Monday, October 13, 2014

The Procrastinator's Guide to the 30 Year Treasury Bond

The following chart shows how many years it would take for a 30-Year Treasury Bond purchase to double in nominal value (based solely on the interest earned and not on market price).

Click to enlarge.

I have added a linear trend line in red to show the long-term floor. Note that it continues to get harder and harder to make money off of money (more and more years needed to double in value), which has been a long-standing theory of mine (since I turned permabearish in 2004).

Those sitting in cash anxiously awaiting better terms are finding out that the 30-Year Treasury Bond is not exactly a procrastinator's dream. As seen in the chart, the train left the station in February of 2011 and does not appear to be returning anytime soon.

Speaking of February of 2011, that sure rings a bell.

February 2, 2011
More Dangerous Advice from Jeremy Siegel

All this means that Tips investors should beware. Although Tips may compensate holders for future inflation, the interest rate that they offer is far too low to offset the risk of rising rates.

Rising rates? Isn't that a hoot? He did not mention the risk of falling rates of course. In hindsight (so far), that was definitely the bigger risk. It was one of my best calls on this blog and I put my money where my mouth was (backed up the truck, so to speak).

Risk abounds? If we buy the 30-Year TIPS and hold it until maturity then we will earn 2.08% over inflation. That's the current rate. No matter what rates do this is what we will earn going forward. As a retiree who values safety, I am completely fine with that. I'm locking it in. I'll be buying the 30-Year TIPS this month in the auction.

The timing could not have been much better. As of today, the rate on the 30-Year TIPS is just 0.90%. The falling rate doesn't do anything for me personally, since I am holding to maturity anyway. I can say this though. I am very thankful that I avoided Jeremy Siegel's "dangerous advice"!

Where do long-term yields go from here? The talking heads say that they can only go up. I would point out that they have been saying that for as long as I can remember. Someday they might even be right, much like The Sun Will Eventually Engulf Earth--Maybe . It's complicated. It will be especially complicated if the global economy continues to sputter. And when I say especially complicated, I really mean...

The clown horn never gets old, lol. Sigh.

See Also:
Wikipedia: Rule of 72

Source Data:
St. Louis Fed: 30-Year Treasury Constant Maturity Rate


Stagflationary Mark said...

For those interested, I did not use the Rule of 72 to generate estimates for the chart. I used the formula within the link to generate the exact values.

Mr Slippery said...

You were right on rates. You can still get some return by getting lower quality AA and A corporate bonds.

Siegel and clown horn never get old. Congress should pass a law requiring economists to wear the clown outfit, giving them discretion on a happy or sad face.

Stagflationary Mark said...

Mr Slippery,

Congress should pass a law requiring economists to wear the clown outfit, giving them discretion on a happy or sad face.

As seen on the Internet:

Roses are sad, violets are crying. I'm happy on the outside but inside I'm dying.

Sounds like something our clown economy might say. D'oh! ;)