On Longer-Dated Treasuries as an Investment Choice: Part 1

Probably the most detested asset class is Treasury bonds. That is why they are worth a look. That, and the chart. Click HERE and HERE for 1-year and long term views of the 10-year T-note. After every recession, people have tried to pick the low in rates. Of course, in the 1950s and perhaps even into the 1970 recession and beyond, people were thinking that rates could go lower, remembering the Depression.

Historically, rates are volatile coming out of a recession; less so coming out of a depression. Since the peak in rates in the early 1980s, there have been new cycle lows in rates during every downturn and lower highs in the upturns.

While there are great arguments about why Treasury yields should now head upward, perhaps fast and high, one generally not-discussed argument for why they may stay low and even head lower is that a slow-growth, moderate inflation scenario could allow the Fed and the banks to make money on their current troubled assets. Perhaps the free market will take mortgage rates to 4.5% on their own, and the 10-year Treasury to 2% if the prevailing inflation rate is 1.4%. So I continue to respect the downtrend that is in force.

As stated above, Treasuries are detested by individual investors, who tend to believe that the world owes them a higher yield. Thus, Treasuries are bought and held by "smart money": governments, banks, insurance companies.

What might have happened last year was the beginning of an end to the secular trend toward low interest rates in non-governmental debt. It might be that Treasuries will experience a rally spurred by public buying that could have a blow-off top similar to that which occurred in the tech sector in the late 1990s into 2000, lunatic though we now see it to have been.

In addition, Louise Yamada has demonstrated that over the history of the U. S., creating a bottom in rates has been a longer process than coming off a peak. So, even if we have seen a long-term bottom in rates, they might meander in the 3-4% range for longer than one might think.

Leaving inflation-linked bonds aside, there are two different basic types of debt, zero coupon (the purer type) and conventional par bonds.

Tomorrow, I intend to go into some basic and unexpected considerations regarding the risks and benefits of zero coupon vs. par Treasuries.

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