Question

Term 1 mo. 3 mo. 6 mo. 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr

Yield 1.73% 1.93% 2.13% 2.34% 2.59% 2.73% 2.90% 3.02% 3.06% 3.14% 3.21%

The above reflects U.S. Treasury yields as of May 22, 2018. Using this data as a reference, describe your ideal fixed income investment (term/maturity) and your reasoning for investing in your selected term/maturity. Additionally, given that rates have been volatile during the past 4 to 5 months, based on your investment objectives and risk tolerance levels would you consider investing in equities(stocks) and/or corporate bonds as alternative investments?

Answer 1

With the given term structure, it is advised to invest in 30 years US treasury since it has the highest yield. The yield is inversely related to bond prices, hence higher yield implies that the bond is available at relatively lowest cost. As the yield is the highest for 30 year tenure, it is advisable to buy this duration treasury.

Also, in case of volatile environment for bond interest rates, the investment may be diversified across the board to include different investment instruments such as equities and corporate bonds. Thus, the ideal strategy is to go for the bonds available at the cheapest rates and to diversify the total outlay amongst the available array of investment products.