Wednesday, July 24, 2013

The Unloved 10-Year Treasury

The following chart shows the difference in yield between the 10-year treasury and the average of the 5-year treasury and 20-year treasury yields.

Click to enlarge.

As seen in the chart, the 10-year treasury is actually yielding about 0.25% more than we might expect. By comparison to other treasuries, it is currently very unloved.

When was the last time we've heard a financial expert on CNBC tell us to buy a 10-year treasury and hold to maturity? All we are told, ad nauseum, is how dangerous treasuries are. Right?

In my opinion, the financial "experts" keep scaring savers into shorter term treasuries because it is "common knowledge" that yields will rise any day now. Meanwhile, is there another group, a more secretive group, which apparently doesn't mind buying the 20-year treasury? That's what I see when I look at this chart anyway. One group clearly embraces the 5-year. Another group clearly embraces the 20-year. It's very polarized. There is no middle ground. I very much doubt that both groups are right. On a risk vs. reward basis, perhaps the 10-year is a bargain.

For what it is worth, I generally prefer long-term TIPS and I-Bonds, but I have also purchased long-term EE-Bonds in moderation (currently yielding 3.53% if held 20 years, since they are guaranteed to double in price over the period). I continue to believe that this economy cannot support high real yields either now or well into the distant future.

This is not investment advice. It's just something to think about.

Source Data:
St. Louis Fed: Custom Chart
U.S. Treasury: Daily Treasury Yield Curve Rates


Anonymous said...

So who is buying the 20-year. Is it pension funds like Calpers? If so, it can't be helping them meet their estimated return of 7.5%. Unless... they expect even lower rates going forward.


Stagflationary Mark said...


Your line of reasoning seems sound to me. Similarly, I purchased that 19-year TIPS bond to help meet obligations I'd have 19 years from now (much like a pension fund would do). That said, I do not expect 7.5% annual returns on it. Heaven help us all if I do! ;)

Perhaps they expect the stock market to yield 15% per year well into the distant future in order to compensate? Good luck on that theory! It will work until it won't of course.

Hey, maybe we're recession-free from here on out though. Just because we've had 20 of them in the past 100 years doesn't mean that we'll be getting any more. Just because the Fed never saw the housing bust coming doesn't mean that they aren't the best financial surgeons on the planet.

Just because I'm layering the sarcasm on heavy, it doesn't mean that I believe all that I write either, lol. Sigh.