DRW Financial
  • Home
  • Contact
  • Blog
  • Home
  • Contact
  • Blog
Search by typing & pressing enter

YOUR CART

4/4/2013

What's up with bonds?

I spent a decade of my life hip deep in the bond markets, trading all sorts of paper and designing portfolios for clients, and I still find the fixed income world very interesting.

One of the most important reference rates for the bond market (as well as the stock market, the mortgage market, the commodities markets, etc) is the 10 year yield on the US Treasury bond.  Here's a look at that rate over the last 5 years:
10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts

While the number bounced around a good bit over that time, from the low 4% range down to just below 1.5%, the trend definitely seems to be steadily lower.  Below the fold, I push the chart back to cover the last 20 years.
10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts

Here the range of rates is much wider, from as high as 8% all the down to that recent low of ~ 1.5%, and again the overall trend seems to point to a trend to lower rates.  In fact, if we max out the available data on YCharts for the 10 year treasury rate back the early 1960s, the trend to lower rates seems to have begun in the 1980s after a 20+ year trend in the opposite direction:
10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts

So, are there things to take away from these charts and the patterns they may suggest?  Is there wisdom here about how to position for the next 5, 10, or 20 years?

My opinions reflect my bias, but I do think there are some interesting talking points readily available from the 10 year rate and it's history:
  • the number is volatile!  2% and 5% are only 3 apart, but that's more than a 50% shift in nominal yield.  A person holding a 10 year bond through a shift in rates from 2 to 5% or 5 to 2% would see a move in price of more than 20%
  • The trend started long before the extreme shift in Fed policy that came out of the 2007 - 2008 financial crisis.  The Fed moving their target rate to ~ 0% has definitely has an impact, but the macro trend was well in place more than 20 years before the "crisis"
  • There is much discussion in the current marketplace about how rates "must rise" from here and how it is a "question not of if, but when"...My guess is that the reality of what is to come has room for multiple schools of thought to be borne out.  Rates can rise, and even rise substantially from the current levels, and still fit within the macro trend.
  • It is easy to imagine that what Bill Gross calls the "new normal" could persist, with rates bound in a fairly tight range on the lower end of the historical spectrum until some unknown event forces a material break in the pattern; my concern is that this unknown event (or events) could precipitate a significant shift in rates in a very short period of time.
  • With all of the above in mind, our view is that there is still a place for people to find value in bonds and fixed income, but only with a thorough understanding of the risks involved.  While there has always been a need to understand the risk of a bond issuer defaulting, or the potential for inflation to overtake the value in a fixed income investment, the current market highlights the need to properly account for duration risks (the volatility in present value as relates to a shift in interest rates).

Comments are closed.

    Author

    David R Wattenbarger, president of DRW Financial

    Archives

    January 2021
    November 2020
    May 2020
    March 2020
    February 2020
    November 2019
    August 2019
    September 2018
    February 2018
    December 2017
    November 2017
    March 2017
    February 2017
    October 2016
    September 2016
    January 2016
    November 2015
    September 2015
    June 2015
    March 2015
    December 2014
    October 2014
    September 2014
    August 2014
    June 2014
    May 2014
    April 2014
    January 2014
    December 2013
    July 2013
    June 2013
    May 2013
    April 2013
    March 2013

    Categories

    All Survey Video

    RSS Feed

Picture
FCL LLC (“DRW Financial”) is a registered investment advisor offering advisory services in the State(s) of TN, GA, IL, OK and in other jurisdictions where exempted.  Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by DRW Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant to an applicable state exemption.
All written content on this site is for information purposes only. Opinions expressed herein are solely those of DRW Financial, unless otherwise specifically cited.  Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

Forms ADV, Privacy Policy, and additional disclaimers may be found here