This shows the annual return you'd be getting if you bought the 10-year treasury 10 years ago.
For example, the most recent data points (with and without 35% taxes) represent a 10-year treasury purchased in September, 1997 and held until September, 2007, then adjusting the return by the amount the CPI-U increased from September, 1997 to September, 2007.
Keep in mind that a 4% loss in the chart is actually per year for all 10 years. Ouch.
This chart shows what $1 invested from 1954 to 1997 would be worth today if continually reinvested in an investment that tracked the first chart's real returns on a monthly basis. Note that this isn't quite the same thing as simply buying 10-year treasuries and reinvesting (just one reinvestment every 10 years, plus interest continually reinvested). This chart is attempting to show how the 10-year treasuries have generally performed over the period. It can be a bit cryptic to analyze, due to the ten year lags involved (both in treasuries and inflation). For example, the value in 1997 was not actually known in 1997. We couldn't know what it was worth until 2007 (once we knew what the inflation rate was between 1997 and 2007).
We don't yet know how a recent purchase of a 10-year treasury will do, because we don't know what the inflation rate is going to be over the next ten years. However, I am not optimistic it will be a fantastic return. There is a chance it could be, if we slide into a deflationary spiral. There is also the chance that it could be very nasty too though, if we slide back down into a stagflationary mess.
In any event, it is my belief that we've grown way too complacent on the 20+ years of tailwinds shown in this chart. Over the long haul, money really hasn't been made in 10-year treasuries and I wouldn't necessarily assume the future will be any different. If real money could be made over the long haul in treasuries, then we'd be looking at exponential growth (and something for nothing).
If you compare the 1-year treasury yield's real returns vs. this 10-year treasury's real returns there really isn't all that much difference in overall performance. You take on much more risk owning the 10-year. During good periods you get vastly more reward. During bad periods you receive vastly more punishment. It all seems a wash to me.
See Also:
Real Interest Rates After Taxes
Real Interest Rates
The Death of Real Yields v.2
Source Data:
FRB: Selected Interest Rates
St. Louis Fed: Consumer Price Index For All Urban Consumers: All Items
I know that Joe Dominguez (Your Money or Your Life) recommended treasuries for a different reason. He said that if you were planning to live off your investments, and you were if you were Financially Independent, the treasuries would be the most secure thing you could put your money into. And it also thought it was easier for someone not financially savvy to focus on just understanding treasuries. For those folks, it probably didn't matter that they were not getting a good return on their money.
ReplyDeleteHi Teri,
ReplyDeleteThanks for your comments.
I'm sitting almost entirely in treasuries for much the same reason (just barely financially independent), although I vastly prefer TIPS and I-Bonds. The inflation adjusted versions take away the risk of having back to back bad years due to rising inflation (while also taking away the reward of back to back good years due to falling inflation).
Those who are not financially savvy get the worst of all worlds more often than not. I'm reminded of the sales pitch I got for an inflation adjusted fund through my bank.
It had 1.7% fees on the "safe" inflation protected treasuries you can get for free straight from the government (or compared to the 0.2% fee version Barclays iShares offers). In other words, at today's interest rates it was taking roughly 1/3rd of the profits for itself. Not much chance that would keep up with inflation long-term. It was presented in a very attractive binder though, for what that's worth. :(