Describe and comment upon the historical patterns of interest rates, high yield

Question

Describe and comment upon the historical patterns of interest rates, high yield spreads, and stock volatility (VIX). Describe and comment upon the historical patterns of return and volatility for each of your three asset classes. What factors do you think drove those results? What is unusual about the apparent historical risk-vs.-return trade-off for commodities? Comment. In your answers to the questions above, note any related or otherwise special factors to consider when projecting forward (5-10 yr.) returns and volatilities for each of the three asset classes.

Answers should emphasize the US economy and US asset classes.

1. What phase of the credit cycle do you think we are in? Name at least three facts or reasons to support your case. Name at least one contradictory piece of evidence.

2. Review the entire

Explanation / Answer

Interest rates fluctuate over time with an historical ceiling, i.e. a maximum level. Even though in high-inflation periods the nominal interest rate can reach extremely high levels, for long decades a ceiling of 10% is a rule for many countries.

High yield spreads have held to their historical pattern of being more resilient to rising interest rates.

Stock volatility (VIX) follows a similar pattern to historic market volatility, as measured by standard deviation or returns, indicating a correlation of volatility over time.

Historically, the following trends are observed for the three asset classes:

Stocks:

Bonds:

Cash equivalents:

Historically, higher the risk, higher is the return for commodities.

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