Friday, December 19, 2014

Trouble With The Curve?

Hardly. This was a good year to be long the long bond.

But this week was time to rotate out of long duration and into something that looks more attractive.

I think the value is in the 5y note. You get 1.65% yield vs 2.77% on the 30 year.

See what other countries' five year paper is yielding:

  • France, 21 bps
  • Germany, 4 bps
  • Italy, 1%
  • Portugal, 1.4% (!)
  • Japan, 3 bps
All lower! So, the U.S. 5y looks like a value to me relative to other countries, to the fed funds rate (much higher) and to the 30 year yield (only 112 bps lower).

If you agree that the USD is the best currency to own right now, then it's doubly strange for U.S. rates to be higher than these other countries'.

1 comment:

Stagflationary Mark said...

For what it is worth, here is my problem with the 5-year yield.

If long-term interest rates continue to fall over the long-term (a high risk if the long-term trend and interest rates elsewhere are any indications), then it is best to lock in rates as far out as is possible.

I'm speaking as a buy and hold to maturity (bond ladder) saver of course.

Put another way, I wouldn't want to load up on the 5-year treasury, be right over the next 5 years (as rates fell), and then be stuck trying to reinvest the cash I made into treasuries with very low yields at that point.

That said, I have a large long-term bond maturing in January of 2016. For cash flow purposes, I intend to invest that money in a 5-year treasury (since I will need the money in 5 years).

I am not optimistic that I will be getting a good yield at that point. I therefore really hope I am wrong about Yellen's ability to raise interest rates.

Bond ladders are funny that way. I always root for higher interest rates. Always. And yet, each individual bond goes up in price any time interest rates fall. Does me absolutely no good though, since I hold bonds to maturity. Go figure.