Comments on: The Yield Curve Yells for Attention

By: More on the Yield Curve « Systematic Relative Strength

More on the Yield Curve « Systematic Relative Strength — Wed, 23 Dec 2009 16:38:40 +0000

[...] on the Yield Curve In light of Mike’s recent commentary on how the yield curve seems to be forecasting powerful economic growth, I wanted to make you aware [...]

By: Bill R

Bill R — Thu, 17 Dec 2009 23:46:54 +0000

From Feb 1971 to Feb 1974, the return on a 10YT was positive, because the yield on a 7YT had only risen to the coupon level of a 3-year-old 10YT. Meanwhile the short end of the yield curve rose a LOT more than the long end.

Just one example from that time period. The curve then was nowhere near as steep as now.

By: Mike Moody

Mike Moody — Thu, 17 Dec 2009 21:19:33 +0000

You could be right—it is at least possible that all of the retail investors piling into bond funds could be on the right side of the market, but it hasn’t worked that way historically. Retail investors have usually been pretty good contrarian indicators. One of the things that made buying bonds with a steep yield curve in place work in some of your examples is that the U.S. was in the middle of a multi-decade secular decline in interest rates. It’s a little more difficult for me to imagine a secular decline in interest rates starting from current levels. At a conference I spoke at in October, one of the other speakers was Dan Fuss from the Loomis Sayles bond group. He felt we could be looking at a multi-decade secular increase in interest rates. If he is correct, the secular trend might not bail out bond investors this time around. On the other hand, even during a rising rate environment like the 1970s or early 1980s, it’s not that common to have big negative total returns on intermediate-term bonds. Thanks for your thoughtful comment.

By: Bill R

Bill R — Thu, 17 Dec 2009 20:48:21 +0000

While I’m totally onboard with a trading/TAA approach to all markets overall, I keep my eye on the bond market as well, and I’m starting to get miffed at the constant mention of a painful next few years for bonds.

1992 and 2003 – coming out of recessions with interest rates at multi-year lows and with extremely steep yield curves – guess what? A GREAT time to buy the long bonds! Precisely BECAUSE the curve was so steep. When the Fed starts raising, the curve will flatten and the long end will not rise much at all compared to the short end. Seen it in the history books and we’ll see it again.

I remember hearing the arguments in 2003. How do those 10-year Ts bought at 4.45-ish percent look right now, with 3-4 years of coupons left?

Timing is EVERYTHING (as a shop devoted to TAA should know).

If someone were to ask about 30-year money and holding to maturity, I don’t know what I’d say, other than that we’ll see 5 or six business cycles before those bonds mature, and probably at least three recessions.

I’d bet strongly that buying a 10-year here, with the intent to hold to maturity, wouldn’t be so smart.

BUT buying out on the curve with the intent of TRADING it in 2-3 years, I bet that would work out quite nicely indeed, for those that are focused on fixed income.

Personally I’m long EM stocks right now, though. TAA rules!