Bond Investors Are Headed to a Massacre

At the battle of Balaclava in 1854, the Light Brigade of the British cavalry, led by Lord Cardigan, charged Russian cannons, with a predictably tragic outcome. Investors who are now buying up government bonds are, in all likelihood, riding toward a massacre of similar proportions. With U.S. 10-year government bond yields recently achieving historic lows, this poses a difficult asset allocation problem for investors: What is one to do for bonds in this yield-impoverished environment?

The lessons of history
I began this article with a historical metaphor, and I'm going to present a warning from the history books against the bloodletting investors are setting themselves up for. At that end of last month, on May 29, the U.S. 10-year Treasury yield fell to 1.65%, the lowest value since March 1946. How, then, did bond investors fare the last time yields were at this level? The following table shows the after-inflation annualized return long-term government bonds produced over the five-, 10-, 20- and 30-year periods beginning in April 1946:

Investment Period

Real Return on U.S. Long-Term Government Bonds, Starting in April 1946

5 years


10 years


20 years


30 years


Source: Ibbotson Associates, a division of Morningstar; author's calculations.

These numbers are absolutely horrific. Let me remind you that these returns are annualized: Over the 10-year period spanning April 1946 through March 1956, for example, the purchasing power of one's investment suffered nearly a one-fourth decline. There is little reason to believe that long-term government bonds bought today will produce a significantly different result.

It could be even worse
This experience was not isolated in time or geography, as the following table of gilt (U.K. government bonds) returns demonstrates. In fact, U.K. investors who bought gilts at the end of 1946 were left even worse off than their U.S. counterparts, as the following table shows. I've also included returns starting at the turn of the 20th century, another point at which U.K. government bond yields were very low (though at 2.74% in December 1899, they were still quite a bit higher than they are today).

Investment Period

January 1900

January 1947

5 years



10 years



20 years



30 years



Source: Barclays Equity Gilt Study 2011.

Perhaps you think these examples are just the product of data mining, that I have pulled three historical examples favorable to my argument and ignored the others. That might be a valid objection if there were no fundamental underpinning to the phenomenon I've described. There is: Bond yields -- and, therefore, bond returns -- are mean-reverting. In plain English, this means that periods of below-average yields tend to usher in periods of above-average yields. As yields ultimately rise off current lows, bond prices will fall, depressing total returns.

For investors with an adequate timeframe who are looking for relatively low-risk income investments, I think the Vanguard Dividend Appreciation ETF (NYSE: VIG  ) is a possibility, but it's not a satisfactory response to the asset allocation problem: What is one to do for one's fixed income allocation? These are my thoughts and suggestions.

Ban these funds (from your portfolio)!
To begin with, when an asset class is overvalued, it follows that one should be underweight that asset class to the benefit of cash or undervalued asset classes. Products like the iShares Barclays 20+ Year Treasury Bond ETF, the Vanguard Extended Duration Treasury Index (NYSE: EDV  ) or the Vanguard Long-Term Government Bond Index (NYSE: VGLT  ) should be banned from your portfolio. If you feel compelled own bonds with essentially no credit risk, then I would suggest the iShares Barclays MBS Bond Fund (NYSE: MBB  ) or the Vanguard Mortgage-Backed Securities Index ETF instead.

Remember, however, that there is -- by definition -- little advantage to be gained in owning assets that offer little or no value for the sake of filling a "bucket" in your portfolio. There is nothing wrong in carrying an overweight position in cash until you find more satisfactory options for your investment assets.

Don't bet against them, either
Finally, if there is one thing that I strongly urge individual (or professional) investors not to do, it is to bet against government bonds using a product like the UltraShort 20+Year Treasury (NYSE: TBT  ) . That might sound curious coming from someone who has spent the better part of this article arguing that the bonds are overvalued. Nevertheless, we are entering a period in which there is an increasing global scarcity of "risk-free" assets; as such, while government bond yields will ultimately rise, I see no obvious catalyst for increases in the near future. There is absolutely no reason bond yields cannot stay at current levels for the next six months, the next year, the next two years or even longer.

If you're planning for your future, you ought to read The Motley Fool's free report to find out the shocking can't-miss truth about your retirement.

Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio; you can follow him on LinkedIn. Motley Fool newsletter services have recommended writing puts on ProShares UltraShort Lehman 20. The Motley Fool has a disclosure policy.

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  • Report this Comment On June 18, 2012, at 3:18 PM, tcostan1 wrote:

    you write "I see no obvious catalyst for increases in the near future". Considering operation twist ends on June 30th and the FED's buying in the long end of the market makes up roughly 60% of the demand for long term treasuries, wouldn't you consider that a catalyst for a near term bump up in rates?

  • Report this Comment On June 18, 2012, at 3:39 PM, TMFAleph1 wrote:


    Broadly speaking, my answer is 'no' -- I don't think that the end of Operation Twist will have much impact on bond yields.

    Bill Gross made a similar argument at the beginning of last year (see the link below) and, consequently, reduced the Total Return Fund's exposure to U.S. Treasuries to zero. This did not work out well for him.

  • Report this Comment On June 18, 2012, at 3:43 PM, chocteach54 wrote:

    Bonds have a place in your portfolio so long as you watch what you are doing (which many people with retirement plans do not). There will be bumps along the road and anyone who thinks otherwise is not paying attention. That being said, diversify, watch your portfolio and get educated about what the terms and investment types are. No one can do this for you

  • Report this Comment On June 18, 2012, at 4:41 PM, walt373 wrote:

    I agree, as long-term investments they don't make much sense. Even in the best-case scenario for bonds, something like a drawn-out Japanese deflation, it doesn't seem like you're being compensated enough for the risk.

    That said, bonds trade on price action nowadays and people don't really care much about the yield. Again, you are spot on when you recommend not betting against them. They will probably go up if the global economy continues deteriorating. So it might make sense to hold bonds if you are bearish on the economy. Owning bonds is probably less risky than shorting the market, buying puts, buying inverse funds, etc. Not everyone is a long-term investor and as a more speculative, trading asset, bonds have value.

  • Report this Comment On June 18, 2012, at 5:08 PM, eddietheinvestor wrote:

    Thanks, Alex. Interesting article. I'm sure you know much more about bonds than I do, but I still want to make a general observation. History doesn't repeat itself exactly; every situation is different, just as those who predicted when the US would get out of the 2008 recession and the growth levels after the recession were wrong because the situation is quite different from that of previous recessions. I am wary when people use historical data to predict future trends. Bonds are not always safe, but they are often safer than stocks, and I am concerned about where the stock market is heading, with high unemployment that has no end insight, a housing bubble that is still in dire straits, a $16 trillion federal debt that is ever expanding, a new health care law that will cost billions, if not a trillion, more than people said, Medicare and Social Security entitlements that will run out in less than 20 years, and the Fed printing lots of money. I am wary of investing in the stock market for these reasons, and these problems were not present in the historical examples (1900 and 1947) that you gave. If the stock market and the housing market are not in good shape, and commodities are very volatile, and gold and silver are priced too high to buy in this late in the game, bonds to me seem like a good buy. Perhaps you will be proven correct, but I still feel safe investing in my bond funds. Thanks for sharing your opinion.


  • Report this Comment On June 18, 2012, at 5:22 PM, ravens9111 wrote:

    Most bond investors don't hold until maturity. In today's bond environment, bond investors buy and sell based on price appreciation. If there is more easing, bond yields will go down further, price will go up. Bond investors won't care about the coupon payment. They will be more than happy to take the price appreciation. When you factor in convexity on longer dated maturities with yields already near all time lows, price appreciation will be significant. When the Fed begins to raise interest rates, you will see a mad exodus of bonds as the price will plummet.

  • Report this Comment On June 18, 2012, at 5:40 PM, CommanderFlipper wrote:

    Thanks, Alex. Do you think munis will be pretty much in lockstep with treasuries?

  • Report this Comment On June 18, 2012, at 6:15 PM, rma1344 wrote:

    The 10 yr could go to1% if Europe cracks up and I believe it will since the flight to "quality" will resume. There is no solution to the euro problem: it's too far gone and sadly so is the US deficit problem. That says gold is the place to be long term.

    Corporate bonds have done very well since 2008 also but quality dividend stocks are a good play also as a fixed income substitute.

  • Report this Comment On June 18, 2012, at 6:20 PM, bondgeek51 wrote:

    I have done well with bonds over the last 20 years, sort of "passively" trading (infrequently) . . . lately I have been seeking yield in the preferred stock market. . . been pleasantly surprised. . . .just saying

  • Report this Comment On June 18, 2012, at 10:40 PM, digitalroom wrote:

    stocks are heading to massacre, too. since the last crash it has gone up way too fast and too much. be very careful either way or you will get burned big time. for bond i'd say take a long hard look at vanguard high yield corporate Inv... VWEHX. i would recommend Vanguard above most mutual funds out there. They've been real good to me and their management fees are among the industry's lowest, if not the absolute lowest! Their ETFs are so good to trade, as well! Check out VTI VWO VGK VIG VYM VOO.

  • Report this Comment On June 18, 2012, at 10:54 PM, mikecart1 wrote:

    Article makes one key mistake of an assumption: It assumes the economy is going to get better anytime soon.

    The fact is that history is unreliable for the stock market. Today's market revolves around computers which wasn't around for trading by most people from the 1990s and before. Also, if anyone has been looking for a job recently, they will know what I know: the economy stinks and bonds will not change much for the next few years. You can't invent jobs and no government official can 'create' jobs either.

    This is a long process. To put all your money in bonds is naive. To not have any money in bonds is naive.

    A long-term bond index can provide a steady flow of money monthly if you know what you are doing.

  • Report this Comment On June 19, 2012, at 12:28 AM, TMFAleph1 wrote:

    <<Article makes one key mistake of an assumption: It assumes the economy is going to get better anytime soon.>>

    I certainly never made that assumption.

  • Report this Comment On June 19, 2012, at 1:02 AM, CMFSoloFool wrote:

    "Article makes one key mistake of an assumption: It assumes the economy is going to get better anytime soon."

    I didn't read that in the article. In fact, the closing of the article states "I see no obvious catalyst for increases in the near future. There is absolutely no reason bond yields cannot stay at current levels for the next six months, the next year, the next two years or even longer."

    As for this statement: "the economy stinks and bonds will not change much for the next few years. You can't invent jobs and no government official can 'create' jobs either." I disagree. The economy may not be firing on all cylinders, or churning out millions of new jobs, but it's not as lousy as that. We have certainly had much worse in the past 5 years, and it certainly seems much better off today than it was in 2008/9.

  • Report this Comment On June 19, 2012, at 1:06 AM, CMFSoloFool wrote:

    Oh, and Gov't officials can create jobs, they can spawn a new branch of government any time, or fund major new projects. Such was the case when the department of homeland security was created.

  • Report this Comment On June 19, 2012, at 2:44 AM, talotu wrote:

    There are two pretty major differences that this article misses completely

    1. In 1946 debt was over 100% of GDP, as opposed to the 55% today.

    2. In 1946 bond rates were not set by auction, but were fixed at issue, citizens were getting substantially below market rates and were asked to buy as a patriotic gesture.

    It's no surprise that once the artificial rate cap was slowly lifted, bond buyers in the 1940's suffered steep losses.

  • Report this Comment On June 19, 2012, at 4:31 AM, veschenko wrote:

    Looking to history is always good as a guide to what might happen again. But, times are always different.

    Instead of historical patterns, I prefer to look at the motivating forces. Fear is driving investors, bankers and foreign central bankers toward a risk-free liquid asset, US treasuries. That demand is driving the price.

    Two catalysts will reverse that dynamic. Anything that causes US treasuries to be seen as not-risk-free (too much govt spending or inflation). Or, reduced financial panic in the world (europe gets its act together).

    Some people are nimble and can get out before it gets bad. Myself, treasuries won't pay me enough interest for the risk/reward.

  • Report this Comment On June 19, 2012, at 6:04 AM, esxokm wrote:

    This is a very interesting article...and I tend to agree with its thesis.

    But I'm not a bond expert, so I must ask: is PTRAX something I should avoid? I actually like this fund, and I was wondering what will happen to its monthly dividends as a result of a bond crash. Will they stay the same, go down?

  • Report this Comment On June 19, 2012, at 7:09 AM, zordan1 wrote:

    Thanks for sharing the `view' from the other side of the world, but from there, here is the other side of the world.

  • Report this Comment On June 19, 2012, at 7:26 AM, TMFAleph1 wrote:

    <<In 1946 debt was over 100% of GDP, as opposed to the 55% today.>>

    I'm not sure what data you're looking at, but today's debt-to-GDP ratio is substantially higher than 55%. As you can see from the following graph, we are not far off the level of 1947:

  • Report this Comment On June 19, 2012, at 7:29 AM, TMFAleph1 wrote:

    <<In 1946 bond rates were not set by auction, but were fixed at issue, citizens were getting substantially below market rates and were asked to buy as a patriotic gesture.>>

    Interest rate caps are not the only means by which financial repression is implemented. ZIRP and quantitative easing are just different tools from the toolkit.

  • Report this Comment On June 19, 2012, at 8:53 AM, Libor8erBlake700 wrote:

    It'd be TEXT-BOOK procedure, were the bank-rate high, to pile into FIXED-INTEREST securities. COROLLARY: when the bank-rate's NEARLY NOUGHT, LEAVE it in the bank. Better still, hedge into something INFLATION-PROOF & CRASH-PROOF. Alex is spot-on, to buy FIXED BONDS now is SUICIDAL unless.... you buy & sell in the troughs & peaks. E.g:-

    INDEXED 0½ 2009-50 Bought 2011-4-14 @ £1026.26, Sold 2012-4-10 @ £1332.32 Redemption (i.e. combined Income & Growth) Yields = 0.52 + 29.82 = 30.34%;

    FIXED 4½ 2007-42 Bought 2008-2-7 @ £995.80, Sold 2008-12-31 @ £1122.96 RY = 4.52 + 12.77 = 17.29%;

    INDEXED 1¼ 2005-55 Bought 2006-5-18 @ £1074.30, Sold 2006-10-16 @ £1222.14 RY = 1.30 + 13.76 = 15.06%;

    FIXED 5% 2001-25 Bought 2011-4-28 @ £1124.10, Sold 2011-8-22 @ £1206.63 RY = 4.45 + 7.34 = 11.79%;

    WAR-LOAN 3½ 1932-52 Bought 2004-10-21 @ £1965.30, Sold 2006-3-31 @ £2122.97 RY = 4.52 + 5.50 = 10.02%;

    CONVERSION 9¾ 1986-2006 Bought 2004-12-15 @ £2605.30, Matured 2006-11-15 @ £2508.00 RY = 9.39 - 1.97 = 7.42%.

    (Where held < a year, growths capped NOT annualized else you'd extrapolate imajinary yields; income ALWAYS annualized as paid in full & accrued/rebated on contracts.)

    Without banking these & many more I'd not have afforded both my children's school fees. All prices archived on for my fellow Englishmen & I assume you've equivalent T-Bonds in America.

  • Report this Comment On June 19, 2012, at 8:54 AM, TMFDarwood11 wrote:

    Interesting article. I've been leery of bonds but as is necessary with allocation, I do own several different bond funds, including a TIPS fund.

    However, I have recently kept my bond allocation at the lowest possible end of the allocation table, preferring to hold cash because: 1) use as short term - 1 year- emergency cash fund; 2) keep as powder for use in making careful buys when opportunity knocks; 3) my general malaise and distrust of both the stock and bond markets; 4) The title of articles such as this one, which have been appearing for several years!

    I know, that's weird! However, as I am in phased retirement, whatever that means, I could be working for another year or another 10. I would say that the current economic environment has made good choices difficult. For example, I planned on a specific income from my work for 2012 based on recent economic experiences, but it looks like I'd do double what I expected. That being the case, I can honestly say that I have and continue to get a better return from my sweat equity than I can from most cash like investments.

    I do look at annual change in net worth as one indicator of how I'm doing.

    BTW, I do include real estate as part of my net worth, and I run two sets of allocation tables. One the traditional with "investments" and another which includes real estate. I rebalance both from time to time. This would be a good time to purchase additional real estate. I would say that if I were younger, I would have purchased additional real estate a couple of years ago. I am of the opinion that the real estate crash provided and continues to provide a once in a lifetime opportunity. But I don't plan on holding for another 25 years; that's for someone younger.

  • Report this Comment On June 19, 2012, at 10:31 AM, sjhstewart wrote:

    At least two years ago I adopted the belief that there was no way yields could get any lower. How wrong I was! The point about not betting against the government is spot on. Also the point about staying away from TBT - a major money loser. Another belief that has been engrained in me since the very beginning of time is that you must be diversified in order to make it through the unexpected events that will occur. There is a FHLB step-up note out that I have been considering. It still won't keep up with inflation, but it will make more that staying in cash.

  • Report this Comment On June 19, 2012, at 11:05 AM, Libor8erBlake700 wrote:

    FOOL SOCIALIST claims Government can create jobs. As Milton Friedman once pointed out to Peter Jay (another socialist) on nationalized (BBC) television, statisticly if bureaucrats interfere often enough they're bound to get 1 or 2 things "right", if only by chance. AT WHAT COST?

    QUEAZY-EAZING & $16Trillion Public Debt? That's a Cost-to-Benefit ratio of MINUS the cube root of INFINITY!!! Like with the Greedy Greek Government it's a GOVERNMENT debt but WE end up footing the bill thru' INFLATION, a TAX on our REAL EARNING & SAVING.

    NAPOLEON SOLO. Who, do you think, caused the tax-subsidiized HOUSING BUBBLE?? No, not the usual scrape-goat, private-enterprize, much-despized bankers. As ever, for the REAL CULPRIT look no further than market-meddling BUREAU-CRASSY. Try this link

    & scroll thru' to Feb 25th.

    CAREER POLITICIANS, Champagne Socialists, however you spell them out, if they never work in the REAL world, create no REAL wealth save for themselves & can only "create" PRETEND-JOBS.

    GEORGE WASHINGTON was a planter, surveyor & soldier before being lumbered with presidensy in 1789. 14 years earlier, he was so pissed off by English government he declared UDI & led the rebellion. Now it seems you must shake off shakkles of your OWN government.

  • Report this Comment On June 19, 2012, at 11:20 AM, TMFAleph1 wrote:

    Please keep the use of capitalization to the minimum required by punctuation and effective expression. No-one here requires whole words to be capitalized in order to read them.

  • Report this Comment On June 19, 2012, at 11:57 AM, Libor8erBlake700 wrote:

    sorry, Alex. so used to bullet-pointing & sub-titling technical reports lest people miss the point emphasised in spoken speech; & commas, in lieu of breaths, are so feint on computer-screen. I use Verdana (shrink-friendly) or old-fashioned IBM type but one can't usually control how an e-mail displays at one's correspondent's. Sometimes people criticize your (or colleagues') articles because they seem to've sailed thru' salient points & then thought you'd said something else. Point taken. Laurie.

  • Report this Comment On June 19, 2012, at 12:45 PM, sept2749 wrote:

    I am in my 60's and had triple tax free munis paying 5-8.75%- yes, old ones. However, about 1/2 got called or became due. As you said there are few safe asset classes around. So, now i'm in equities and doing well - for now. I felt much safer having munis and a few equities. Now i'm about 65% in munis and the rest in equities. I really don't want to work until I drop dead - although I'm beginning to think that is what our government wants.

  • Report this Comment On June 19, 2012, at 4:40 PM, ravens9111 wrote:

    Investors today are not buying bonds for coupon payments. They are buying bonds for capital appreciation. Before Operation Twist was implemented, the Fed hinted that they were going to buy the long end of the curve months before they announced it. What did investors do? They bought the long end before the Fed. Price went up. Investors made a bundle on price appreciation. You think they are holding for the coupon payment? Not a chance.

  • Report this Comment On June 19, 2012, at 4:44 PM, PositiveMojo wrote:

    An asset is only an asset if it generates cash, after inflation. Bonds are currently a horrible asset to own, even in a diversified portfolio. Why? Because they aren't really an asset, they are an expense!

    If you think that the current rate of inflation is 3.1%, think again. Ask any college student about inflation, or their parents for that matter, the cost of tuition has skyrocketed and is not included in that 3.1%. Figures lie and liars figure.

    The technology currently exists to analyze the data to determine the true inflation rate, but there is not motivation to do so, because, it would inflict major pain on our political leaders due to their disasterous financial decisions and thinking they could somehow control market forces, which nobody has been able to do in over a 100 years of history.

    My point is that today, bonds are not an asset.

    We would all like the pleasure of investing in a stable asset that actually grew in value. I would like to see an article that discussed what that asset might be.

  • Report this Comment On June 19, 2012, at 4:49 PM, TMFAleph1 wrote:

    <<Investors today are not buying bonds for coupon payments. They are buying bonds for capital appreciation.>>

    Quite possibly, but individual investors who play this game are the victims of another misunderstanding: The notion that, somehow, they have an edge in bond trading that will allow them to make money at the expense of investment bank bond desks, bond mutual funds and fixed income/ global macro hedge funds.

  • Report this Comment On June 19, 2012, at 4:53 PM, TMFAleph1 wrote:

    <<We would all like the pleasure of investing in a stable asset that actually grew in value. I would like to see an article that discussed what that asset might be.>>

    Strictly speaking, there is no such asset. You can have volatility and capital growth or stable capital value with little/ no growth, but you can't have a stable value asset and capital growth.

  • Report this Comment On June 19, 2012, at 5:08 PM, PositiveMojo wrote:

    @TMFAlehp1. I'm confused. You say there is no such asset that will grow in value in the current climate. Yet, millions of people people are investing in stock, real estate, gold, silver, oil, etc., all of which they think are are "assets" and will actually return cash. Are they all crazy? Maybe they are just following old habits and are mentally conditioned to think of all things as "assets".

    If each of these investors did not have the "hope" that their investment would grow in value, they would be stuffing their mattresses with cash.

    I have heard people say over and over again, that we are in "uncharted" financial territory. But at the same time, when we examine history, we know that all things financial have cycles. Is this "cycle" going to be different that all of the others and establish a new "norm"? It is doubtful.

    It would be great if someone did a little homework and compared the different asset classes to see where they lie on the continuum. Does the asset show signs of strength? Is it repeating a historical cycle? Are there any external factors that could kill growth? How much growth is anticipated?

    We would all enjoy the pleasure of having honest answers to these questions.

  • Report this Comment On June 19, 2012, at 5:09 PM, luckyagain wrote:

    Yes, bonds are dangerous but so are stocks and every other investment instrument. I always get a kick out of the gold bugs stating that gold is the way to go but at the same time want government to go back on the gold standard. Now I do not particularly like gold or other metal as an investment but I much rather have the price of these metals set by the market instead being set by the government. The more diversity in your portfolio, the lesser the chances of being wrong. So for most investors something like the ETF SPY might be the way to go. It currently yields a 2.1% dividend which is much better than any US government bond at the present time. Since it has 500 different stocks in it, the chances of a really big OOPS is small.

  • Report this Comment On June 19, 2012, at 8:25 PM, TMFAleph1 wrote:

    <<You say there is no such asset that will grow in value in the current climate.>>

    I didn't write that. What I wrote is that you can't expect capital growth without bearing price volatility, i.e. equity returns come with equity risk.

    Gold, silver and oil are purely speculative assets and they certainly don't "return cash".

    As far as studying asset class returns, that is the main focus of my investment approach and my research. The point of the article is that the bull market in bonds is substantially over, and investors can expect horrendous *long-term* returns from this asset class from this point on.

  • Report this Comment On June 20, 2012, at 5:52 AM, CommanderFlipper wrote:

    <<bull market in bonds is substantially over>>

    Alex, do you include long term muni bond funds?

  • Report this Comment On June 20, 2012, at 10:43 AM, PositiveMojo wrote:

    @TMFAleph1. Thanks for the clarification. When you said, "Strictly speaking, there is no such asset." I assumed you were responding to my statement, "We would all like the pleasure of investing in a stable asset that actually grew in value", and was surprised by your response, which appears to be a misunderstanding.

    I agree, wholeheartedly, that amount of return is normally related to risk. But, isn't the whole idea behind buying any asset, whether it is speculative or not, is to see an eventual "return of cash", either to you or your heirs?

    I thoroughly enjoyed your article.

  • Report this Comment On June 20, 2012, at 12:03 PM, veschenko wrote:

    <<Investors today are not buying bonds for coupon payments. They are buying bonds for capital appreciation.>>

    Nominal value of bonds are clearly defined. The only capital appreciation to be found is if somebody else is willing to pay more for it later on. At some point you'll run out of investors willing to do that - and the bubble goes 'pop'.

  • Report this Comment On June 20, 2012, at 2:19 PM, TMFAleph1 wrote:

    <<Alex, do you include long term muni bond funds?>>

    Yes, to the degree that all non-distressed bonds are priced off of Treasuries.

  • Report this Comment On June 22, 2012, at 3:48 PM, mainelefty wrote:


    I appreciate the article and your subsequent comments.

    If you happen to know whether there is value erosion in TBT at stable rates, I would appreciate more insight into that asset. I know there's a term for that but "backwardation" is such an arrestingly bizarre word that it sticks in my head and I can never remember the actual term.

    I understand the case for the unpredictable timing of mean reversion but it seems plain to me that current rates are historically low and the long end of the curve is directly manipulated to keep rates low. PIMCO or at least Bill Gross thought so at one point, but seemingly grew tired of the unremitting losses.

    TBT at current levels would seem to be a leveraged position that could be stable at these prices and a high value performer when long rates start higher.

    I understand if you want to dodge having this thread devote too much ink to TBT, but I have been using it as a mean reversion, higher long rate position and, so far, have the losses to prove it. I'm thinking about a double down, on the guess/belief/supposition/surmise that the economy will improve at some point and a 5% 10 year bond will be with us.

  • Report this Comment On June 22, 2012, at 5:07 PM, revealedin71 wrote:

    According to a recent article in the Wall Street Journal, the foreign purchasers of our government bonds are not interested in yield nor appreciation.. they are buying mainly to stabilize their currencies vs the dollar (which takes a of buying) and are content with return of capital at maturity. This is a recent phenomena, and it really changes the whole spectre of government bonds. Interest rates could remain very low for many years......

  • Report this Comment On June 22, 2012, at 5:25 PM, TMFAleph1 wrote:


    With the caveat that I am not offering specific financial advice:

    The problem is see with TBT is that, if one is making a bet against bonds, one should structure the bet in a manner that is consistent with a bet that could take several years to play out. By its nature, TBT is not well adapted to that type of bet since it is designed to reflect *daily* price performance (or -2x daily index return, specifically.) Personally, I would not feel confident that TBT will adequately reflect a view on falling rates, should that view take 18 months, two years or longer to unfold.

  • Report this Comment On June 22, 2012, at 6:20 PM, SkepikI wrote:

    The last time I heard "interest rates could remain low for many years" I was a child and that comment stuck with me as they crept up right up to the late 70's when they started to go through the roof. Shortly thereafter was the last time I heard "interest rates could remain high for many years" as I took out a "bargain" 12% second mortgage in 1980. I wish I could say all I've read above was foolishness, but that would defeat the purpose-ha.

    The ugly fact that bond proponents and allocation mavens keep neglecting is that bonds are nearly boxed in with nowhere to go to appreciate. Interest rates are near zero, do you think bond holders are going to pay interest to issuers for the privilege of getting their money back? Just try this small piece of analysis that nobody seems to do- take the interest rate of the 10 year treasury to 0.01 % (who would be willing to take that deal?) How much does the bond "appreciate" pitiful. so the cap on the top end is very unattractive. Now, take the interest rate up by 5%- where does the price of existing bonds need to go to maintain yield? Bond holders get well, murdered. (or maybe bond purveyors when the holders get to their necks) Current bond investors lose everything they made in the last what 2 years? Three years? Recipe for panic.

    Whatever "earnings" are left at these yields will be eaten up in the first few months of a downward trend. I stay away until interest rates at least come up to where you can make some money in the long term. You cant now. I figure this is "costing" me about 1% of "lost interest" per year (not exact but near enough). The 2-10% decline in bond prices that's coming sometime in the next 5 years will more than make up for my lost interest.

  • Report this Comment On June 26, 2012, at 7:03 PM, MAXwolf wrote:

    I read a good number of financially related articles weekly. Most are of a much lesser quality than this one. Nice work.

    Also, and perhaps the best part, was reading the discussion the article generated. Many comments, on the subject, generally showing an effort to be constructive and provide additional insight, wow. No off subject rants, name calling and nut job outbursts.

    Refreshing, and I learned some things.



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