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Daily Treasury Real Yield Curve Rates
December 14, 2011
5-Year: -0.74%
7-Year: -0.42%
10-Year: -0.04%
20-Year: 0.53%
30-Year: 0.73%
Here's the premise. Let's say that you are a saver and wish to own inflation protected treasuries for 30 years. What's the optimal way to play the yield curve?
1. You could buy the 30-year TIPS and just lock in the 0.73% real yield. Little math needed. You know what you get.
1.0073^30 = 1.244
2. You could buy the 20-year TIPS and earn 0.53% for the next 20 years. You'd need to earn 1.14% per year for the remaining 10 years to match the return of the 30-year TIPS.
(1.0053^20) * (1.0114^10) = 1.245
3. You could buy the 10-year TIPS and earn -0.04% for the next 10 years. You'd need to earn 1.12% per year for the remaining 20 years to match the return of the 30-year TIPS.
(0.9996^10) * (1.0112^20) = 1.245
4. You could buy the 7-year TIPS and earn -0.42% for the next 7 years. You'd need to earn 1.09% per year for the remaining 23 years to match the return of the 30-year TIPS.
(0.9958^7) * (1.0109^23) = 1.246
5. You could buy the 5-year TIPS and earn -0.74% for the next 5 years. You'd need to earn 1.03% per year for the remaining 25 years to match the return of the 30-year TIPS.
(0.9926^5) * (1.0103^25) = 1.245
Only hindsight will tell us which option was best. Options 2-5 do require higher real yields in the future (between 1.03% and 1.14%). They may come. They may not.
So what does this really mean?
Not only is the bond market suggesting that the next 5 years will treat savers poorly, it isn't exactly predicting great things for the 25 years that follow either.
I think the bond market is pretty much in line with my own predictions at this point. For what it is worth, I think the death of real yields has probably run its course. For all intents and purposes, real yields are now dead. That doesn't mean that I expect rates to move higher from here. I don't. If I had to guess, I'd say rates will stagnate (to match our economy). Could be wrong of course. It is just a guess.
And lastly, let's go back in time to when Jeremy Siegel warned us not to buy TIPS.
February 2, 2011
5-Year: 0.09%
7-Year: 0.68%
10-Year: 1.16%
20-Year: 1.82%
30-Year: 2.10%
Oops. In hindsight, 2.10% in the hand was worth more than today's 0.73% in the ivory tower. Who knew? Now savers (and pension funds?) are praying for 1% real yields. Well, there's always hope.
This is the End and a New Beginning
-
I've been thinking about this for some time.
After 21 years of writing this blog almost daily, I've decided to stop
writing the daily updates on the blog.
...
17 hours ago
6 comments:
And for those in stocks, the next Rubicon moment in the S&P 500 should be along within a couple days.
Who Struck John,
Are you suggesting that there will be a 31st crossing of the Rubicon? What an amazingly bold prediction! ;)
Mark,
could you have added ibonds and even e bonds to that metric? I am thinking of grabbing e bonds next week as the allocation for both has been reduced to 5k in 2012. I may be wrong, but 10k in e bonds look better over 20 years.
I'd appreciate your thoughts.
I don't know how many Rubicon crossings lie ahead of us. I do feel that we are getting closer to the final crossing and it will be on the down-side.
Not ultimate-final, just for-a-long-time final.
The DJI top in 1929 wasn't hit again until 1954. That kind of final.
WASF!
JzB
fried,
10k in e bonds could be better but you better know what inflation will do. I bonds are a bit more inflation agnostic.
That said, the bond market says you are right (using inflation expectations in the TIPS market). Further, I did buy e bonds this year and last.
I would have included it in my analysis here but I think it pretty much goes without saying that 0.00% i bonds are better than -0.74% 5-year TIPS (and for more reasons than just the difference in interest rates).
Jazzbumpa,
I don't know how many Rubicon crossings lie ahead of us. I do feel that we are getting closer to the final crossing and it will be on the down-side.
You could be right. If I knew the stock market would simply trade sideways then I would probably prefer it over 0% i bonds. That's only if I knew though.
I'm not willing to take the risk that you are right. It is certainly a non-trivial one.
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