Possible for treasury bonds to hit 10%?
Possible for treasury bonds to hit 10%?
This is way before my time but I know bonds hit about 15% back in the late 70s and early 80s. Is it possible to hit those rates again over the next couple years ? If it did , how would that affect your AA? Presumably if one could lock in a rate above the average long term equity return for 30 years, would you shift equities to bonds ?
Thank you for the advice.
Thank you for the advice.
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Re: Possible for treasury bonds to hit 10%?
If long term treasury bonds hit 10%, equities will absolutely crater. Equities are longer duration, higher risk assets than long bonds and will maintain higher expected returns. And if nominal treasury yields are 10%, I’d expect stubbornly high inflation resulting in modest or no real yields.
So I’d keep whatever pittance I had left allocated the same way.
So I’d keep whatever pittance I had left allocated the same way.
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Re: Possible for treasury bonds to hit 10%?
If inflation stays around 6 to 8% per year, it is entirely possible for rates to get that high. Yes, it would hurt very badly in the short term. Folks who invested through the late 1970 and early 80s will be able to tell you some hard stories.
The key question are:
- whether or not current very low treasury bond rates as compared to inflation are currently a meaningful input causing more inflation and if the Fed believes that too.
- have the other inflationary inputs (e.g., supply chain issues, oil restrictions, gov't spending, current demographic trends, etc.) begun to moderate independently or are the continuing to apply pressure?
No, I don't know the answer to either question as there are way too many variables in play for amateur's or even professionals to fully know the truth.
The key question are:
- whether or not current very low treasury bond rates as compared to inflation are currently a meaningful input causing more inflation and if the Fed believes that too.
- have the other inflationary inputs (e.g., supply chain issues, oil restrictions, gov't spending, current demographic trends, etc.) begun to moderate independently or are the continuing to apply pressure?
No, I don't know the answer to either question as there are way too many variables in play for amateur's or even professionals to fully know the truth.
Re: Possible for treasury bonds to hit 10%?
If anything, I would shift (or not shift) based on the real yield of TIPS. I would not attempt to guess the future inflation rate. Long-term bond holders in the 1980s and 1990s saw price increases in part because of falling inflation rates and falling inflation expectations. This trend and its timing appears obvious only in hindsight. Ideally, one would make the shift in an environment with strong economic growth and high real yields--something resembling the late 1990s. That is not currently what we are experiencing.
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Re: Possible for treasury bonds to hit 10%?
This topic is now in the Investing - Theory, News & General forum.
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Re: Possible for treasury bonds to hit 10%?
Nice summary!retiringwhen wrote: ↑Sun May 22, 2022 10:24 pm If inflation stays around 6 to 8% per year, it is entirely possible for rates to get that high. Yes, it would hurt very badly in the short term. Folks who invested through the late 1970 and early 80s will be able to tell you some hard stories.
The key questions are:
- whether or not current very low treasury bond rates as compared to inflation are currently a meaningful input causing more inflation and if the Fed believes that too.
- have the other inflationary inputs (e.g., supply chain issues, oil restrictions, gov't spending, current demographic trends, etc.) begun to moderate independently or are the continuing to apply pressure?
No, I don't know the answer to either question as there are way too many variables in play for amateur's or even professionals to fully know the truth.
Possible? - yes.
Likely? - no (IMHO).
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: Possible for treasury bonds to hit 10%?
The problem, of course, is if they (nominal rates) were to climb to 10%, you would have no way of knowing whether they will continue up to 20% - in which case your purchase of a 30-year bond at 10% would have been a very bad idea indeed. A much better strategy (from the standpoint of Pascal's wager) is to purchase TIPS (chosen to mature when you need the money) if the real rate gets very high.
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Re: Possible for treasury bonds to hit 10%?
Possible but not probable, I think. Long term I don't see any forces to sustain high inflation, quite the contrary. Neutral might be as low as 3%. If things got that bad it would really hurt my portfolio, maybe cutting it in half, but I would keep working and save even harder knowing it might be the best opportunity of my career. Imagine being 40 in 1982, planning to retire around 2000. Effortless millions to be made in that scenario.
70% Global Stocks / 30% Bonds
Re: Possible for treasury bonds to hit 10%?
Ahh, but what will the 10 year TIPS rate be under this scenario? The US didn't have TIPS in the 80's, so history doesn't provide much of a guide.Call_Me_Op wrote: ↑Mon May 23, 2022 6:50 am The problem, of course, is if they (nominal rates) were to climb to 10%, you would have no way of knowing whether they will continue up to 20% - in which case your purchase of a 30-year bond at 10% would have been a very bad idea indeed. A much better strategy (from the standpoint of Pascal's wager) is to purchase TIPS (chosen to mature when you need the money) if the real rate gets very high.
Would people be willing to accept a zero TIPS yield, just to avoid inflation worry? Or would TIPS yields continue to rise with the nominal rate as we've been experiencing the past several months?
Re: Possible for treasury bonds to hit 10%?
The answer to what I would do in that case would be that I would rebalance to my target asset allocation.
I would not be interested in the kind of tactical asset allocation as described here: https://corporatefinanceinstitute.com/r ... sification.
I would not be interested in the kind of tactical asset allocation as described here: https://corporatefinanceinstitute.com/r ... sification.
Re: Possible for treasury bonds to hit 10%?
Is it feasible to raise rates that high at this point? I thought the higher national debt acted as a kind of soft cap for how high rates can go without putting undue strain on the budget.
I would love to see 10 year treasuries returning 5% real or so.. I would accept a 50% cratering of equities to reach a paradise like that
I would love to see 10 year treasuries returning 5% real or so.. I would accept a 50% cratering of equities to reach a paradise like that
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Re: Possible for treasury bonds to hit 10%?
Anything is possible. It doesn't seem likely, but a year ago neither did 8% inflation, $5 gas or a Russian invasion of Ukraine.
Not at all. By the time that happens, the information is already priced in and it's too late to do anything.If it did , how would that affect your AA?
Adjusting your investments, including asset allocation, based on market conditions amounts to trying to time the market. That's a bad idea.
You're essentially describing the underlying mechanism of "pricing in information," namely supply and demand. Essentially, if the return on equities doesn't compensate for the risk, then people won't buy equities, which will drive up the price of equities and drive down the price of bonds.Presumably if one could lock in a rate above the average long term equity return for 30 years, would you shift equities to bonds ?
You're talking about a mispricing in the market. These things don't exist for a long time in a big way like you're suggesting, because the markets are liquid and there are lots of people doing arbitrage.
Just stick to your AA, rebalance once a year, and ignore your investments or the market the rest of the year.
Re: Possible for treasury bonds to hit 10%?
I have heard this before, but economic "theory" suggests the opposite. High demand for loanable funds (or anything for that matter) increases price or in this case interest rates. Government deficits "crowds out" the private sector via higher interest rates. So, there is that ...
The U.S. has experienced the opposite in recent decade -- higher deficits and lower interest rates -- so much for economic theory -- in no small part due the Fed policies being easy. A similar story occurred in Japan and Europe.
In summary, no one knows ...
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
Re: Possible for treasury bonds to hit 10%?
The UK introduced index-linked gilts in 1981. I'm not sure what their inflation situation was back then, but you might be able to get an idea of how it would work by looking at those.SJIRon wrote: ↑Mon May 23, 2022 12:40 pmAhh, but what will the 10 year TIPS rate be under this scenario? The US didn't have TIPS in the 80's, so history doesn't provide much of a guide.Call_Me_Op wrote: ↑Mon May 23, 2022 6:50 am The problem, of course, is if they (nominal rates) were to climb to 10%, you would have no way of knowing whether they will continue up to 20% - in which case your purchase of a 30-year bond at 10% would have been a very bad idea indeed. A much better strategy (from the standpoint of Pascal's wager) is to purchase TIPS (chosen to mature when you need the money) if the real rate gets very high.
Would people be willing to accept a zero TIPS yield, just to avoid inflation worry? Or would TIPS yields continue to rise with the nominal rate as we've been experiencing the past several months?
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Re: Possible for treasury bonds to hit 10%?
Just wanted to mention that most of those ultra-high rate bonds issued before 1985 were called in early by the U.S. Treasury. The highest rate that I still hold is 7.625% from November 1992.
Re: Possible for treasury bonds to hit 10%?
I didn't know they could do that. So you have to agree to lock up your money for x years but the treasury only has to pay its promised rate for as long as it feels like?KlingKlang wrote: ↑Mon May 23, 2022 1:24 pmJust wanted to mention that most of those ultra-high rate bonds issued before 1985 were called in early by the U.S. Treasury. The highest rate that I still hold is 7.625% from November 1992.
Re: Possible for treasury bonds to hit 10%?
Thanks for the pointer.exodusNH wrote: ↑Mon May 23, 2022 1:13 pmThe UK introduced index-linked gilts in 1981. I'm not sure what their inflation situation was back then, but you might be able to get an idea of how it would work by looking at those.SJIRon wrote: ↑Mon May 23, 2022 12:40 pmAhh, but what will the 10 year TIPS rate be under this scenario? The US didn't have TIPS in the 80's, so history doesn't provide much of a guide.Call_Me_Op wrote: ↑Mon May 23, 2022 6:50 am The problem, of course, is if they (nominal rates) were to climb to 10%, you would have no way of knowing whether they will continue up to 20% - in which case your purchase of a 30-year bond at 10% would have been a very bad idea indeed. A much better strategy (from the standpoint of Pascal's wager) is to purchase TIPS (chosen to mature when you need the money) if the real rate gets very high.
Would people be willing to accept a zero TIPS yield, just to avoid inflation worry? Or would TIPS yields continue to rise with the nominal rate as we've been experiencing the past several months?
The earliest data series I could find starts in 1985, and fits right into this discussion. The UK nominal 10yr yield was 10% and the 10yr TIPS yield was 3.5%. So implied 10yr inflation rate was 6.5%.
Sorry if this is a bit tangential to the OP. However an option for a guaranteed real return of 3.5% might well cause some people to reduce stock allocation. Or maybe the historical 7% real return from equities is still too much higher for most people to bite.
Re: Possible for treasury bonds to hit 10%?
Treasury bonds issued before 1985 were callable at par at certain points along their maturity. I bet someone here knows which bonds were callable and what proportion of them ended up being called!Tamalak wrote: ↑Mon May 23, 2022 2:04 pmI didn't know they could do that. So you have to agree to lock up your money for x years but the treasury only has to pay its promised rate for as long as it feels like?KlingKlang wrote: ↑Mon May 23, 2022 1:24 pm Just wanted to mention that most of those ultra-high rate bonds issued before 1985 were called in early by the U.S. Treasury. The highest rate that I still hold is 7.625% from November 1992.
Re: Possible for treasury bonds to hit 10%?
And that 3.5% fits well into another discussion where someone showed that historically, long-term government bonds above 3% are rare.SJIRon wrote: ↑Mon May 23, 2022 2:12 pmThanks for the pointer.exodusNH wrote: ↑Mon May 23, 2022 1:13 pmThe UK introduced index-linked gilts in 1981. I'm not sure what their inflation situation was back then, but you might be able to get an idea of how it would work by looking at those.SJIRon wrote: ↑Mon May 23, 2022 12:40 pmAhh, but what will the 10 year TIPS rate be under this scenario? The US didn't have TIPS in the 80's, so history doesn't provide much of a guide.Call_Me_Op wrote: ↑Mon May 23, 2022 6:50 am The problem, of course, is if they (nominal rates) were to climb to 10%, you would have no way of knowing whether they will continue up to 20% - in which case your purchase of a 30-year bond at 10% would have been a very bad idea indeed. A much better strategy (from the standpoint of Pascal's wager) is to purchase TIPS (chosen to mature when you need the money) if the real rate gets very high.
Would people be willing to accept a zero TIPS yield, just to avoid inflation worry? Or would TIPS yields continue to rise with the nominal rate as we've been experiencing the past several months?
The earliest data series I could find starts in 1985, and fits right into this discussion. The UK nominal 10yr yield was 10% and the 10yr TIPS yield was 3.5%. So implied 10yr inflation rate was 6.5%.
Sorry if this is a bit tangential to the OP. However an option for a guaranteed real return of 3.5% might well cause some people to reduce stock allocation. Or maybe the historical 7% real return from equities is still too much higher for most people to bite.
Re: Possible for treasury bonds to hit 10%?
Here is that other thread: viewtopic.php?t=374775
Not sure about the etiquette of reposting images in new threads, but here is the table showing frequency counts for "yield on the safest bond" across the last two centuries:
Perhaps the most important statistic is the overall median: 3.40%. Turns out, a yield of even 4% on the safest bond is somewhat high, historically—well above the median. A yield of 6% is quite rare, coming in at the 87th percentile. Only once did British Consols ever yield that much (during the Napoleonic wars). And yields above 8% are very unusual, coming in at about the 95th percentile.
And 10%? Only for one stretch around 1980.
Not sure about the etiquette of reposting images in new threads, but here is the table showing frequency counts for "yield on the safest bond" across the last two centuries:
Perhaps the most important statistic is the overall median: 3.40%. Turns out, a yield of even 4% on the safest bond is somewhat high, historically—well above the median. A yield of 6% is quite rare, coming in at the 87th percentile. Only once did British Consols ever yield that much (during the Napoleonic wars). And yields above 8% are very unusual, coming in at about the 95th percentile.
And 10%? Only for one stretch around 1980.
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