Which statement is most correct?
a. long-term treasury bond yields are typically less volatile than are short-term treasury bond yields.
b. inflation rates and treasury yields are typically negatively correlated.
c. 1-year and 30-year treasury yields are typically positively correlated.
d. two of the above answers are correct.
e. all of the above answers are correct.

D. Two of the above answers are correct.

Explanation:

The two options correct are: B- Inflation rates and Treasury yields are typically negatively correlated. C - 1-Year and 30-Year Treasury yields are typically positively correlated.

A is not correct at all, as in long-term treasury bond funds are exposed more time than in short-term Treasury bonds, therefore volatility will be at least the same, and usually (almost always) higher, but never less.

And this is precisely the reason why C is correct, as higher volatility means higher yields, so if 1-year Treasury yields increase, 30-year Treasury yields increase as well, as 30-year T-Bonds are typically more volatile (or just as volatile as) 1-year T-Bonds.  

As for B, we can affirm that typically treasury yields (or interest rates) are negatively correlated with inflation rates, because as interest rates raised by central banks (like the US Fed) makes the demand of funds (ask for loans) to fall, so there is less money in the economy, which means less investments (also, as interest rates are higher) and less money for consumption, so prices tend to fall. Also, if you take Milton Friedman's approach on inflation, i.e. "inflation is always and everywhere a monetary phenomenon", by reducing the money (funds) circulating in economy, you reduce inflation.

In other words, to raise the interest rates is a contractionary monetary policy that can lead you to lower inflation rates, and that's why many countries of the world use that measure to counter inflation rates, or keep them low and stable.

However, we should mention that not always this happens. That's why I highlighted the word Typically which is written in answer B.

For example, if there is inflation, it could happen that investors expect inflation to be higher in the future. This means inflation expectations are higher, and when this happens, interest rates tend to rise as well, as investors demand a higher return to compensate the loss of the currency value due to inflation. This is just an example of why it could happen that inflation rates and treasury yields can be positively correlated. Another example you can see in Argentina, where the treasury yields are around 70% (very high) and it's one of the countries with higher inflation rate in the world (between 50% and 60% yearly).

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