Could we see a 1% 10-year Treasury note yield?

[karluk]

Could we see a 1% 10-year Treasury note yield? | David Kotok's Tumblr

This article hasn't been properly updated with current bond yields - the 10 year t-note briefly touched a 1.75% yield earlier today. But it does provide a reasonable framework for those who believe that bonds have farther to rally rather than facing inevitable price declines that accompany rising yields. The author appears to be making the case that, as low as yields in the U.S. are right now, even lower yields abroad make U.S. treasuries a viable option.

Look around the world at 10-year yields in various countries on December 31. In the Eurozone, benchmark Germany was at 0.54%. Netherlands was 0.68%, Austria was 0.71%, France was 0.84%, Italy was 1.88%, and Spain was 1.61%. In Switzerland (which pegs its currency to the euro) the yield was 0.37%.

Elsewhere in Europe but not in the Eurozone, Sweden was at 0.94%, Norway was 1.55%, and the United Kingdom was 1.76%. And in the country with the highest amount of QE and the largest debt-to-GDP ratio, Japan, the 10-year yield was 0.33%.

Compare these yields with the yield of the 10-year US Treasury benchmark note on December 31. It was 2.17%. That’s right, the world’s reserve currency, denominated in the strengthening US dollar, in a country that has ceased QE and is shrinking its federal deficit, was yielding more than the others. If you were sitting abroad and allocating bond monies globally, which bond would you select for your sovereign-debt global fund?

 

[Running_Man]

Possible but not likely we are already at historic lows. It is rare that the issue of too much debt is ultimately solved by offering ever increasing quantities of lower debt interest. Banking has a hard time existing with interest rates that low.

 

[seraphim]

US treasuries are considered a secure investment for foreign investors because of the stability of the government. Stability, for them, is the attraction. Personally, I don't see yields decreasing much further. They're up a bit from the lows of several years ago. I think they'll maintain a relative position until interest rates are permitted to rise.

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[audreyh1]

US treasuries are considered a secure investment for foreign investors because of the stability of the government. Stability, for them, is the attraction.


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Plus they see the dollar rising and expect that to continue. The US Treasury rates are much higher than those available in Europe or Japan.

 

[jim584672]

If we see 1% we will be headed for a Japan style deflation.

 

[Cobra9777]

If we see 1% we will be headed for a Japan style deflation.

My non-COLA pension is looking better all the time.

 

[Mulligan]

My non-COLA pension is looking better all the time.

I worried I'm gonna get deprived of my 2% COLA next year. CPI has to be at least zero to get the COLA. If below I get to sit out a year on receiving one. They base it from July to June, so it could be close.


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[karluk]

Personally, I don't see yields decreasing much further. They're up a bit from the lows of several years ago.

You could be right that we're already near the lowest yields we'll be seeing. However, it's not completely accurate to say that yields are "up a bit from the lows of several years ago." The yield on the ten year t-note is, indeed, higher now than it was a few years ago, but I read today that 30 year treasuries just set their all time record low yield. To me that's an astonishing statistic. Something's going on right now that has convinced investors to flee to the perceived safety of long term government bonds to an even greater degree than they did during the financial panic of 2008 and its aftermath.

30-year Treasury yield hits record low after Fed statement - MarketWatch

For its part, the Fed statement added to the day’s push into bonds, and yields fell as a result.

Treasury prices surged, with the 10-year yield falling 9.6 basis points to 1.729%, its lowest level in about two weeks, while the 30-year yield slumped 10.3 basis points to 2.295%, its lowest level ever.

 

[karluk]

Regardless of where and when interest rates finally hit bottom, I find this bond rally to be absolutely breathtaking in its scope and intensity. Holders of Vanguard's two long term government bond funds, VLGSX and VUSTX, have enjoyed an almost 9% return in January. That's equivalent to several year's of yield at current interest rates in only a single month. And over the past thirteen months, both funds have returned over 30% - stock-like returns from an asset class that almost nobody had anything good to say about at the end of 2013, which ironically would have been the ideal time to invest. As Jack Bogle is fond of saying, "Nobody knows nothing", at least as far as accurately predicting future investment returns.

 

[imoldernu]

Re: interest rates hitting bottom....

Try this:
https://translate.google.com/translate?sl=auto&tl=en&js=y&prev=_t&hl=en&ie=UTF-8&u=http%3A%2F%2Fwww.dr.dk%2FNyheder%2FPenge%2F2015%2F01%2F30%2F0130122132.htm&edit-text=

For the first time a Danish mortgage bank, Nordea Kredit, issued a mortgage with a negative interest rate, Jyllands-Posten's corporate site Finans.dk Friday .
This means that Nordea Kredit this week have had to pay interest back instead of charging them to a handful of customers, says housing economist at Nordea Kredit, Lise Nytoft Bergmann for Finance.

 

[clifp]

Regardless of where and when interest rates finally hit bottom, I find this bond rally to be absolutely breathtaking in its scope and intensity. Holders of Vanguard's two long term government bond funds, VLGSX and VUSTX, have enjoyed an almost 9% return in January. That's equivalent to several year's of yield at current interest rates in only a single month. And over the past thirteen months, both funds have returned over 30% - stock-like returns from an asset class that almost nobody had anything good to say about at the end of 2013, which ironically would have been the ideal time to invest. As Jack Bogle is fond of saying, "Nobody knows nothing", at least as far as accurately predicting future investment returns.

The investment adviser for the Pearl Harbor organization that I'm involved with hosted a dinner this week. (The let's spend $1,000 (there were 20+ people) to explain why you guys paid us tens of thousands of dollars in fees to for a 4-5% return dinner as I called it.) They had probably 10 different managers managing the bond portfolio and all of them stayed away from long-term treasuries. I'm normally pretty harsh on them, but this year I just couldn't criticize them, for not investing in long treasury bonds. If that had put 35% (the BND weighting) of our fixed income in long term bonds and interest rates had risen a point or two, I would have screamed.

But that does beg the question. If all the "smart money", and all of us who at least pay attention to what the smart money didn't buy long term treasuries. Who the heck did? Bond Index funds aren't that big of a factor are they.

 

[haha]

Of course we could. Will we? Totally different question and one that I cannot answer.

Ha

 

[audreyh1]

The investment adviser for the Pearl Harbor organization that I'm involved with hosted a dinner this week. (The let's spend $1,000 (there were 20+ people) to explain why you guys paid us tens of thousands of dollars in fees to for a 4-5% return dinner as I called it.) They had probably 10 different managers managing the bond portfolio and all of them stayed away from long-term treasuries. I'm normally pretty harsh on them, but this year I just couldn't criticize them, for not investing in long treasury bonds. If that had put 35% (the BND weighting) of our fixed income in long term bonds and interest rates had risen a point or two, I would have screamed.

But that does beg the question. If all the "smart money", and all of us who at least pay attention to what the smart money didn't buy long term treasuries. Who the heck did? Bond Index funds aren't that big of a factor are they.

On the other hand:

There are still powerful forces at work favoring long US treasuries.
GARY SHILLING: 11 Reasons To Favor US Treasury Bonds - Business Insider

Gundlach thinks the 10-year could take out the 2012 low of 1.38%, but he doesn't say whether it will get to 1%.
Jeffrey Gundlach's Surprising Forecast - Barrons

In one of the comments someone proposes that the reason long bonds have dropped so much is a reaction to an expected premature Fed tightening (that will result in harming the US economy), rather than huge demand from overseas.

 

[Mulligan]

On the other hand:

There are still powerful forces at work favoring long US treasuries.
GARY SHILLING: 11 Reasons To Favor US Treasury Bonds - Business Insider

Gundlach thinks the 10-year could take out the 2012 low of 1.38%, but he doesn't say whether it will get to 1%.
Jeffrey Gundlach's Surprising Forecast - Barrons

In one of the comments someone proposes that the reason long bonds have dropped so much is a reaction to an expected premature Fed tightening (that will result in harming the US economy), rather than huge demand from overseas.

I don't play the treasury market but my commitment to buying preferreds is paying off for now. The spread between these two are incredible now.


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[audreyh1]

Here is an interesting historical graph of the yield curve for US Treasuries. The yield curve is the graph from shortest term debt to the longest (30 year). Over time the curve will be steep (often), flatten (~2004), invert (~2000), etc. as all interest rates do not move in lock step. Adding historical data gives a 3-D graph. Overall, the long-term trend is still down, but with lots of ripples on the way. The short-end has gotten so close to zero sometimes just lays flat.

The curve has been quite steep lately, you'll see comparing to the past. This confirms my instinct that the short-term rates may rise, but the long-term rates could still drop, thus flattening the curve. If the economy weakens, then more rate dropping across the board.

This was linked to from a M* discussion.