Tuesday, October 11, 2011

Beware the safety of Treasuries

These charts show the extreme volatility in the yield on 30-yr Treasuries in the past several years (below) and days (top). Since Oct. 4th, long-term T-bond yields have risen from 2.7% to 3.1%, a rather extraordinary move that has slashed the price of the long bond by almost 8% from last week's high. (How's that for a risk-free investment?) It's looking a lot like we have seen a major reversal of the panic that last week drove yields down to levels that implied the onset of a global recession/depression. Yields are still very, very low, however, and still priced to very dire assumptions about the U.S. economy's ability to grow. But T-bonds are far from being safe investments, even with the approach of Operation Twist. In the end, it's all about Europe and whether Europe goes down the drain and drags everyone with it. If Europe just manages to survive, long-term bond yields have plenty of room to rise, and prices to fall.


Benjamin Cole said...

I am trying to move family member portfolios out of bonds, but then who listens to family members? I think there is little upside left in this sector.

That said, around 1995 one could have concluded it was risky to stay in long-term Japanese debt. Instead it was Japanese real estate and equities that continue to fall (to this very day in the case of real estate), while bonds held their value.

The Federal Reserve and Congress are following the same policies as Japan: Federal deficits, but hold inflation below two percent, possibly even one percent.

The tight money strategy, after a national real estate bust-recession, seems to instill a perma-gloom on investors and the economy.

That might be one reason real estate in the USA is trading for half-off, and equities are still at 1999 levels. The market sense we are doing a Japan.

The cost of beating inflation is very, very high in terms of lost output.

Anonymous said...

I wish people would stop comparing present-day US with Japan's "lost decades." While there are superficial similarities, there is a crucial difference: For the past several decades, the Japanese yen has been rising, and it is likely to continue rising for quite some time. The US dollar, on the other hand, is in a long-term secular decline - another trend almost certain to continue for another couple decades or so.

A rising yen is one reason why the Tokyo stock exchange has underperformed since its 1989 bubble - the large number of multinationals on their stock exchange have gotten decreased foreign earnings when converted to yen. The US is in the opposite situation. It's little surprise the stock market and the manufacturing sector have led the recovery in the US - those are the sectors which benefit most from a falling dollar.

Not sure how that's going to affect the bond market, though I suspect a continually falling dollar will keep inflation pressures up, which in turn will mean rising yields.