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FINM2001
I have received inquiries about the monthly returns of eTB (GSBG33.AX). Below is a graph of monthly returns for 1/2016-9/2023. If you take the five-year average, you will find a negative monthly return of around -0.11%. Thank you for the students pointed this out to me. So why is this happening? The past five years have been economically (and socially) turbulent, and the RBA's policy has responded to the economic environment. The first phase has been lowering the RBA cash rate during the pandemic, where the RBA lowered its rate as low as 0.10% p.a. The second phase is after 2022, when RBA started drastically raising its cash rates. In particular, the second phase should have drastically reduced bond prices. This is obvious because bond prices and interest rates (i.e., discount rates) correlate negatively. This must have contributed to the negative returns computed based on prices. As we try to find one-month holding period returns of risk-free bonds, we are using the prices of eTB GSBG33. Is this the best instrument to use? Not really, as this is a long-term bond. Prices are more volatile than those of short-term bonds. Also, this is not a zero-coupon bond but a coupon bond. However, prices are easy to obtain since this bond has been relatively well-traded for more than 5 years on the ASX. (While there are eTBs with shorter maturities, which is better for our purpose, trading seems thin, and continuous price data is unavailable.) Given the above constraints and the negative returns, are there any ways to mitigate the limitations? At least for the negative returns, you could adjust for coupons. Since the coupon is 4.5% p.a., you may add 0.37% per month {=(1+0.045)^(1/12)-1} to the average return that you computed using prices, which should give you a positive number. (You may also read the survey of market risk premium and the HBR article on cost of capital to enrich your discussion.)