Chartered Financial Analyst (CFA) Practice Exam Level 2

Which of the following factors can affect Treasury Market Returns?

1. Changes in Corporate Earnings

2. Changes in the Level of the Yield Curve

3. Changes in Market Sentiment

4. Changes in Dividend Yields

The correct answer is: Changes in the Level of the Yield Curve

The level of the yield curve is a crucial factor that affects Treasury market returns. The yield curve represents the relationship between interest rates and the maturity of debt securities issued by the government. Changes in the level of the yield curve can indicate shifts in economic conditions, expectations for inflation, and future interest rate movements. When the yield curve shifts, it reflects changes in demand for Treasuries and can impact the prices of existing Treasury securities. For example, if the yield curve steepens, it generally implies that investors expect stronger economic growth or rising inflation, which can lead to higher interest rates. Rising interest rates can cause the prices of existing Treasury bonds to decline, impacting overall returns. In contrast, the other factors mentioned have less direct relationships with Treasury market returns. For instance, changes in corporate earnings primarily influence equity markets rather than the fixed-income markets, including Treasuries. Market sentiment may affect investor behavior but does not inherently change government securities' cash flows or interest payments. Similarly, changes in dividend yields are relevant to stock market performance and do not directly impact Treasury securities, which are not dividend-paying instruments. Overall, the level of the yield curve serves as a primary driver of Treasury market returns due to its implications for interest rates, economic outlooks