The Impact of Crude Oil Investments in Bond Portfolios: Can Oil Serve as a Hedge Against Long Term Bonds?

Posted: 23 Mar 2014

See all articles by Sharath Sury

Sharath Sury

Strategic Investors in Financial Innovation & Risk Management (SIFIRM); San Diego State University; University of California, Santa Cruz; DePaul University

Manda B Sury

DePaul University - Department of Finance

Date Written: March 1, 2014

Abstract

The specter of rising interest rates in the US has caused many to consider the impact this will have on the traditional “anchor” to the portfolio: US Treasury bonds. From a mathematical point of view, rising interest rates unambiguously reduce the value of long duration bond holdings, particularly those with low or zero coupons. As investors reposition their portfolios for anticipated macroeconomic conditions, they are searching for alternative investments that can mitigate the potential capital losses in their bond holdings. This paper examines the relationship between long term bonds and crude oil (as measured by the exchange traded proxies, iShares 20 Year Treasury Bond [NYSEArca: TLT], iShares 7-10 Year Treasury Note [NYSEArca: IEF], the United States Oil Fund LP [NYSEArca: USO], the iPath S&P 500 GSCI Crude Oil TR Index [NYSE: OIL], and the iShares Dow Jones US Oil & Gas Exploration & Production [NYSEArca: IEO] respectively); and the possible effects investments in oil may have in diversifying a predominantly bond-oriented portfolio.

Keywords: bonds, oil, correlation, oil and gas, fixed income, diversification, sury

JEL Classification: A1, E44, E58, G1, G10, G11

Suggested Citation

Sury, Sharath and Sury, Sharath and Sury, Manda B, The Impact of Crude Oil Investments in Bond Portfolios: Can Oil Serve as a Hedge Against Long Term Bonds? (March 1, 2014). Available at SSRN: https://ssrn.com/abstract=2413028

Sharath Sury (Contact Author)

Strategic Investors in Financial Innovation & Risk Management (SIFIRM) ( email )

9505 Hidden Valley Rd
Suite 100
Beverly Hills, CA 90210
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HOME PAGE: http://www.sifirm.net/SHARATH-SURY.html

San Diego State University ( email )

San Diego, CA 92182-0763
United States

University of California, Santa Cruz ( email )

1156 High St
Santa Cruz, CA 95064
United States

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

HOME PAGE: http://driehaus.depaul.edu/departments/finance/faculty-and-staff/Pages/default.aspx

Manda B Sury

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

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