August 10, 2010
WSJ: The Great American Bond Bubble - Jeremy Siegel and Jeremy Schwartz
If 10-year interest rates, which are now 2.8%, rise to 4% as they did last spring, bondholders will suffer a capital loss more than three times the current yield.
I think it is safe to say that Jeremy Siegel believed bonds were in the 9th inning in August of 2010. It's been more than five years. Assuming one inning per year, bonds must therefore be in the 14th inning.
Those who purchased the 10-year treasury five years ago are now holding 5-year treasuries that are still yielding 2.8%. Current investors of 5-year treasuries are only getting half that.
Hey, Jeremy! When are they going to lose their money? That mythical bubble better pop before the bonds mature! Or did you not factor in what holding to maturity could do?
The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.
Yes. All the long-term TIPS I have purchased over the years are exactly like the tech stocks during the dotcom bubble. Well, there are a few differences.
1. Since I have and am holding to maturity, I don't require a greater fool.
2. I am guaranteed to get all my money back plus compensation for inflation.
3. I am given additional interest as well.
Yes, sir. Exactly like failed tech stocks! How did tech investors ever lose money with such favorable guarantees? It shall remain a mystery that only the "Wizard of Wharton" can solve!
Full Disclosure: Still comfortably sitting in the long-term TIPS he so desperately warned me to sell. Still planning to hold to maturity. Still waiting for the mythical short-term Saver's Paradise to magically appear. Still hoping for higher interest rates so I can reinvest on more favorable terms when my bonds mature. Still not holding my breath though. Still hoping for the best. Still planning for the worst.
It might not be the smartest plan, but it'a heck of a lot better than the dumbest plan. I have no regrets about my decision to lock in real yields for the long-term in this economy. Hindsight has been kind to me. The era of making easy money off of easy money is over. I believe and believed that with every fiber of my being, but would love to be proven wrong. Sigh.
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