Monetary policy and fixed income returns

Abstract

This analysis extends the findings of previous researchers by examining the relationship between Federal Reserve monetary policy and long-term returns to various sectors of the U.S. corporate and governmental bond markets. The results of this analysis show that corporate bond market return patterns are strongly associated with Federal Reserve monetary policy periods. Specifically, bond market indexes exhibit higher returns and lower standard deviations of returns during expansive monetary policy environments. In fact, all of the corporate bond indexes analyzed in this study exhibited negative Sharpe ratios during restrictive monetary policy environments. This would indicate that investors would be better off by investing in T-bills rather than corporate bonds during restrictive monetary policy environments. At minimum, the results suggest that investors in the corporate bond market should closely monitor Federal Reserve monetary policy.