Task 1 (Analysis of historical US bond and money market yields):
I. Repeat the analysis of the Embedded Research Project but this time use US data for your analysis. Data for US bond and money market yields can be found at https://www.federalreserve.gov/releases/h15/data.htm#fn11. In particular, you must construct a graph of the following series, using monthly data:
a. The yield on 90-day Bank Accepted Bills/Negotiable Certificates of Deposit
b. The yield on 2-year US Government Bonds
c. The yield on 5-year US Government Bonds
d. The yield on 10-year US Government Bonds
e. The yield on Indexed US Government Bonds
NOTE: You should plot the average yield for these Bonds/Bills for each month in your sample (i.e. do not plot daily yields). You should plot these series using the same or similar sample period as for the corresponding Australian series.
II. Then for each of the US series above, briefly explain the trends in yields seen in your graphs (e.g. there may be a macroeconomic shock that causes yields to change over a certain time period).
III. Conclude this part of the assignment by explaining how investors in US fixed income securities would have performed over the given sample period. You do not need to do any calculations for this. You only need to explain the link between bond returns and the trends in bond yields that you have observed although you may need to explain some assumptions you are making in your analysis.
Task 2 (Comparison of historical US and Australian bond and money market yields):
I. Compare historical bond and money market yields in the US and Australia by plotting the following three graphs:
a. The yield on Australian 90-day Bank Accepted Bills/Negotiable Certificates of Deposit and the yield on equivalent US Bank Accepted Bills/Negotiable Certificates of Deposit
b. The yield on Australian and US 10-year Government bonds.
c. The yield on Australian and US Inflation-Linked bonds
II. For each graph above, briefly explain the trends seen in those graphs with respect to both countries' bond yields (e.g. there may be a global macroeconomic shock that causes both US and Australian bond yields to change in the same direction over a certain time period). Explain whether and when there are common factors affecting US and Australian bond yields and whether and when there are different factors affecting US and Australian bond yields.
III. Note: You do not have to take into account the AUD-USD exchange rate in your analysis in this section as we have not discussed this in lectures. You can assume in this section that you are either an Australian investor who is looking at historical US bond yields and factors to see if that contains any information for Australian bond yields or you are a US investor looking at Australian bond yields and factors to see whether that contains any information on Australian bond yields.
Task 3 (What factors will affect future Australian and US bond yields?):
I. Suppose that you are an Australian investor who will be investing in Australian fixed income securities from September 2015 until December 2016. What factors do you think will affect Australian bond yields from now until December 2016?
Are those factors the same as described in Task 2 or are there new factors that will influence Australian and US bond yields in the next 12-15 months? Should this investor be analyzing Australian factors that will affect Australian bond yields or analyzing US factors that may affect Australian bond yields or both? Should they analyze factors affecting other countries, for example China and the Euro zone?
II. Now suppose that you are a US investor who will be investing in US fixed income securities from September 2015 until December 2016. What factors do you think will affect US bond yields from now until December 2016? Are those factors the same as described in Task 2 or are there new factors that will influence Australian and US bond yields in the next 12-15 months? Should this investor be analysing
US factors that affect US bond yields or analyzing Australian factors that may affect US bond yields or both? Should they analyse factors affecting other countries, for example China and the Euro zone?
III. Conclude this section of the report (and your assignment) by explaining how investors in Australian fixed income securities and investors in US fixed income securities will perform from now until December 2016. You do not need to do any calculations for this. You only need to explain the link between the factors you have described above (that you think will affect bond yields in these countries) and the potential returns investors might achieve. You will also need to explain the assumptions you are making in reaching those conclusions.
V. SOME OVERALL REPORT GUIDELINES: Your report should contain a brief introduction, the required graphs and an explanation for the trends in yields seen in those graphs as well as a conclusion and a references section.