Wednesday, August 4, 2010

Playing Offense Defensively with the Long Bond

More and more deterioration in small business and consumer data make this period look more and more similar to the similar period two years ago, with the stock market looking both a bit toppy on certain sentiment data (Lowry's at a 13 + year short-term overbought high) yet looking like rolling over a la 2008.

Given that the 30 year T-bond is reported to be at a record number of basis points above the 10 year note, currently at about 114 bps, and that what matters just as much perhaps is the ratio of yields (who would care if the 10 year were at 90% per annum yield and the 30 year were at 93%?), which is that much farther into record territory, going long the 30 year (with or without an offsetting short against the 10 year, which is not my style at all), is a relatively low risk purchase. If done with the inherent leverage of a zero coupon long bond, so much the better given that the yield to maturity is greater for the zero vs. par bond and also provides a truly reliable yield, unlike the par bond that assumes reinvestment income where currently there is none.

This is said with full knowledge of and concern about the massive Federal deficits.

Disquieting times . . .

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