Risk Management Lessons from Interest Rates

When looking at the breakdown between the front-end and the back-end of interest rate markets within the last 30 years, there could be a myriad of catalysts and hindrances that provide a clearer picture of the difference between periods of prosperity versus calamity. While the valuation of the interest rate environment uses data to correctly ascertain the measure, there are also a number of similarities that provide the rationale for why these markets have behaved in this manner. The perspective of risk and return for two varying yield curve durations can potentially be deemed irrelevant, but there is also a strong framework in place to believe that there may be reason to believe in a correlation between the two. Through the work of this paper, the idea will be to confirm the validity and basis of two different theta classes, specifically in this paper, the difference between interest rates, and from there, to determine any level of reciprocity. The approach to measuring any level of variance between the two will be determined by looking through both lenses via a qualitative approach, including external macro conditions, as well as a quantitative approach, including an analysis of annual returns among both classes. Through the combination of these parameters, a further technical approach will be incorporated to gauge potential risk management measures. With the addition of widely practiced risk management as well, the paper will attempt to conclude any relationship between interest rates through the varying lens of the investor.