Today I bought a chunk of WFC.PR.L, and $TLT assuming the yields have peaked. While I also have this nagging feeling, I am catching a falling knife.
Are we looking at 6% 10 yr, 30 yr in the near future?
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Are we looking at 6% 10 yr, 30 yr in the near future?
@Kingran I have been watching Treasury yields for over 20 years. I’m hesitant about this also.
There are some big “ifs” that pressure the Treasury real yield.
If inflation increases due to the tariffs and reduced immigration.
If deficits grow like the CBO is predicting, overwhelming market demand and forcing yields higher (prices lower).
If the U.S. antagonizes foreign buyers, such as China, so they no longer want to buy U.S. Treasuries. Just as important, if the tariff war reduces Chinese imports as intended, so the Chinese don’t have as many trade surplus dollars to invest in Treasuries.
If the Federal Reserve continues to allow its bloated book of Treasuries to roll off (as planned) and doesn’t reverse course and suppress Treasury yields with QE.
Elevated risk premium due to market uncertainty.
The Treasury real yield is currently lower than the pre-2000 norm. I consider the years 1990-2000 to be a “normal” decade because inflation was pretty well-controlled at that time and the market had finally stabilized after recovery from the Volcker shock treatment.
It’s quite reasonable to expect the Treasury real yield to be in the range of 3% instead of under 2%. Then add the factors above.
The market’s inflation expectation is stable at 2.3%.
A real yield of 3% would give a 10YT nominal yield of 5.3%. But the other factors and risk premium could potentially increase the nominal yield to 6%.
I would consider buying individual bonds, collecting the interest and holding to maturity. (Or death, which is likelier for me.) I would not consider buying a bond fund like $TLT because the NAV will fall if the interest rates rise and you may never regain the principal. The longer the fund’s duration the bigger the loss.
I think $TLT may be a falling knife that has further to fall. I don’t necessarily think it would be unwise to gradually build a ladder of individual bonds to hold to maturity.
Wendy
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