Wednesday, June 1, 2011

10 Year Under 3%

So, in the short run, bond yields rising have proven to be anything but a sure bet. The chart below is a chart of the 10 year U.S. Treasury yield and the current yield has been pushed below 3%. The 3% level is a big psychological level on the 10 year as indicated by the yellow trend line in the chart. In 2008 and during the summer of 2010, the ten year broke below the 3% line as deflation fears spiked and investors ran to the Treasury market as a safe haven. And that break in the bond yield only marked the beginning of a vicious bond bull that would last for months.

The bond bull took yields down to 2% in 2008 and 2.3% in 2010 as indicated by the rising green trend line at the bottom of the chart. If this current break of 3% is a sign of further bond strength then we could see 2.5% on the ten year bond by the time it ends (the intersection of the yield and the rising green trend line). That would be a 15% drop in the yield and would be a significant gain in the Treasury market over the next few months.

At a time when our portfolio duration (price sensitivity to yield) is under benchmark, we have been mulling the bond market over for the past few weeks. We could use our small cash positions to purchase Treasury bonds, increasing our duration to try and protect portfolios during this slow growth patch; we could sit tight with our current allocation; or we could use this bond rally as an opportunity to further reduce duration in anticipation of stronger growth by the end of the year. We will soon be reaching a decision on this issue.