Originally Posted by Lsbcal
Here is one source for LT Treasury data: https://research.stlouisfed.org/fred2/series/GS20
Here is the chart:
We see that the rates are at levels of the 1950's. Where will it head? Nobody knows but the valuation story is not compelling. I would want to convince myself that I would have enjoyed the ride in the 1950's and 1960's compared to, say, 5 year Treasuries.
The biggest threat to model here is inflation rather than interest rate sensitivity.
A 20 year bond with a 3% coupon has a duration of about 15 years. From 1950 to 1970 it looks like interest rates climbed from 3% to something a bit under 7.5%. That's an increase of about 20bp each year which would result in an annual principal loss of about 3%.
But that 3% loss in principal is offset by the 3% coupon on your bond. So you're really looking at 0% total return in year one. Each subsequent year, though, your interest rate sensitivity declines so you actually start earning a bit of money in year 2 and beyond on a nominal basis.
The big problem is that when you get your initial investment back at maturity in 1970 that money buys a whole lot less than it did in 1950. If you don't model that too, you miss the big story.