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CHAPTER 8 - TERM STRUCTURE AND VOLATILIT... > III. TREASURY RETURNS RESULTING FROM...
III. TREASURY RETURNS RESULTING FROM YIELD CURVE MOVEMENTS
As we discussed in Chapter 6, a yield measure is a promised return if certain assumptions are satisfied; but total return (return from coupons and price change) is a more appropriate measure of the potential return from investing in a Treasury security. The total return for a short investment horizon depends critically on how interest rates change, reflected by how the yield curve changes.
There have been several published and unpublished studies of how changes in the shape of the yield curve affect the total return on Treasury securities. The first such study by two researchers at Goldman Sachs (Robert Litterman and José Scheinkman) was published in 1991.77 The results reported in more recent studies support the findings of the Litterman-Scheinkman study so we will just discuss their findings. Litterman and Scheinkman found that three factors explained historical returns for zero-coupon Treasury securities for all maturities. The first factor was changes in the level of rates, the second factor was changes in the slope of the yield curve, and the third factor was changes in the curvature of the yield curve.