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Why Ten-Year Government Bond Returns Are Not Monthly Risk-Free Rates

Article Quant Q&A · Author: codingjockey
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Summary

The document asks whether monthly returns on a ten-year government bond can stand in for a monthly risk-free return, assuming sovereign default risk is ignored. The answers largely reject that proxy, emphasizing the mismatch between a long-maturity bond return and a short monthly risk-free rate. One response suggests dividing an annualized Treasury bill rate by twelve as a simple monthly conversion, giving a historical illustration.

The discussion offers little supporting explanation or a consistent calculation method: other answers simply point to external references or state that the bond proxy is unsuitable. Dividing an annual rate by twelve is only an approximation and presumes a compatible annualized quote and compounding convention. The exchange does not specify the relevant market, currency, or exact risk-free instrument, so selecting an appropriate short-term rate depends on the use case.

Key ideas

  • A ten-year government bond’s monthly return is not equivalent to a one-month risk-free rate.
  • The replies favor a short-term Treasury bill rate over a long-duration bond return.
  • Dividing an annualized bill rate by twelve is offered as a rough monthly conversion.
  • The discussion does not specify a market, currency, or compounding convention.

Tags

Fixed incomeStatistics
Full text
# Given monthly returns of 10-Year Govt Bond, how to get monthly risk free rate of return


# Given monthly returns of 10-Year Govt Bond, how to get monthly risk free rate of return












I have a list of monthly returns of a 10 year Govt Bond. I am not sure if this is a good proxy for the monthly risk free rate of return.

Can somebody suggest how I can derive the monthly risk free rate of return from this monthly return of Govt Bonds. Ofcourse, this is just a simple case. I don't want to take in account any default probabilities of the Govt (Sovereign risk etc).

Simple put is the monthly return of a 10 Year Govt bond a good proxy for risk free rate over a month?

## Answer by Richi Wa (score 4)

https://quant.stackexchange.com/a/9608

I would answer your question with no.





So two times no. A small "no" for taking government rates for the risk free rate and a big "no" for taking the 10 year rate for a monthly rate.

## Answer by ana (score 0)

https://quant.stackexchange.com/a/10425

jup, just devide it through 12 :) Example /between 2004-2008): Average annualized T.Bill rate =3,27% Monthly Riskfree rate = 3,27%/12 = 0,272%

## Answer by Aksakal almost surely binary (score 0)

https://quant.stackexchange.com/a/10426

here's your answer

basically, I'm saying NO, it's not a good proxy at all

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.