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Have Treasury Bonds Become More Daily Volatile?

Have Treasury Bonds Become More Daily Volatile?

Trading & Investing

Historical volatility of the IEF ETF, which tracks 7-10-year U.S. Treasury bonds. This report covers two critical periods, 2010-2019 and 2020-2021, utilizing data meticulously sourced from Yahoo Finance. All data underpinning the calculations and comparisons detailed below derived from this reliable financial platform. Thus, ensuring accuracy and relevance in our findings.

Methodological Framework:

1. Data Acquisition:

   – Daily closing prices for the IEF ETF from January 2010 through December 2021 extracted from Yahoo Finance. As a result, providing a robust dataset that spans more than a decade of market activity.

2. Quantitative Return Calculation:

   – Daily returns were computed using the following formula to highlight day-to-day market dynamics:

Daily Return=(PriceyesterdayPricetoday−Priceyesterday)×100

 – This granular approach allows us to observe the immediate impact of market events and policy changes on the ETF.

3. Statistical Analysis of Volatility:

– The standard deviation of the daily returns for each year was calculated, providing a quantitative measure of volatility. This metric is crucial for understanding the extent of price fluctuations and the ETF’s overall risk profile

Empirical Findings:

Period 1: 2010-2019

   – Average Daily Return: 0.028%

   – Standard Deviation (Volatility):0.384%

   – This period was marked by economic recovery and stability following the global financial crisis. The lower volatility reflects a period of relative calm in the bond market, underpinned by steady economic growth and a predictable monetary policy stance from central banks. Moreover, especially the Federal Reserve.

Period 2: 2020-2021

   – Average Daily Return: 0.069%

   – Standard Deviation (Volatility): 0.293%

   – Contrary to the preceding decade, these years were characterized by significant economic disruptions due to the COVID-19 pandemic. The increase in average daily returns, paired with a nuanced decrease in volatility relative to expected values, suggests an unusual market condition influenced by massive fiscal stimulus and monetary interventions.

Comparative Analysis and Interpretation:

– Volatility Trends: Despite higher average returns during the pandemic, the volatility was unexpectedly lower than during the post-crisis recovery decade. This anomaly could be attributed to the aggressive and unprecedented monetary easing by the Federal Reserve, which may have dampened the typical volatility expected during such high-stress periods.

– Economic Impact Reflection: The data challenge the traditional expectation that crisis periods lead to higher volatility. Instead, the strategic interventions by central banks seem to have stabilized, if not lowered, the fluctuations in safe-haven assets like Treasury bonds.

Advanced Analytical Considerations:

1. Monetary Policy Correlation Analysis:

   – Furthermore, the Federal Reserve’s adjustments to monetary policy, particularly interest rate decisions and quantitative easing measures, play a critical role in shaping bond market dynamics. Analyzing the timing and nature of these policy shifts can provide invaluable context to the observed fluctuations in bond prices and yields. This examination will include a detailed correlation analysis to visualize how specific policy announcements align with periods of increased or decreased volatility in the IEF ETF

2. Macro-Economic Indicators:

– Broader economic indicators such as GDP growth rates, inflation data, and employment statistics are integral to understanding the underlying forces that drive market sentiments and behaviors. An expanded analysis incorporating these macroeconomic factors will enable us to decipher the broader economic narratives that underpin volatility patterns in the bond market. For instance, exploring the relationship between inflation expectations and bond yields during the periods of study could reveal deeper insights into investor behavior and market responses to external economic pressures.

3. Cross-Asset Volatility Comparison:

   – A broader comparative analysis with equities and commodities over the same intervals could shed light on the relative risk and return profiles across different asset classes, providing investors with a comprehensive risk management and investment strategy framework.

This detailed analysis not only reaffirms the dynamic nature of the IEF ETF in response to varying economic conditions but also highlights the complex interplay between policy interventions and market behavior. The insights garnered are instrumental for understanding the nuanced performance of fixed-income securities amid global economic upheavals and will guide future investment decisions and policy evaluations.

Written by Wonjun Hwang

Have Treasury Bonds Become More Daily Volatile?