With December payrolls raising concerns and CPI reports confirming inflation near 3%, long-term treasury ETFs like TLT and ZROZ are tumbling. Yields are at levels not seen since the 2000 Dot Com bubble. While inflation and economic stability are uncertain, I’m skeptical about yields rising much further. Do these levels signal a buy for long-term treasuries? I’d love to hear your thoughts.
Historically, long-term yields are often 200-300 basis points above the Fed funds rate. With the Fed rate at 4.375%, 6-7% yields aren’t unprecedented. The inverted yield curve of the last 2.5 years was an anomaly.
@Thayer
Yields might not reach 6-7% due to the debt-heavy economy. Many companies would struggle to refinance, leading to bankruptcies. The Fed could step in to cut rates as unemployment rises.
Avery said:
@Thayer
Yields might not reach 6-7% due to the debt-heavy economy. Many companies would struggle to refinance, leading to bankruptcies. The Fed could step in to cut rates as unemployment rises.
Debt markets are driven by supply and demand. High debt supply and low demand push yields higher. The Fed can influence but not control long-term rates.
@Orin
The Fed can influence rates via quantitative easing (QE), which has previously lowered yields significantly. However, QE has inflationary risks.
I’m sticking to short-term treasuries for now, building a ladder. If yields improve, I may extend to 5 years, but not longer at this stage of my life.
Buying long-term treasuries could be a hedge against a recession, but if inflation persists, real returns might not be attractive. Consider dividend growth stocks like SCHD instead.
The easiest way out of federal debt is inflation. Holding bonds during high inflation exposes you to real losses. The Fed might not raise rates aggressively due to debt concerns.
The issue isn’t just inflation but also who’s absorbing the large supply of US debt. With the Fed no longer in QE mode, demand might not match supply, pushing yields higher.
It might not be time yet. The Fed doesn’t seem ready to cut rates, and the yield curve may continue to normalize.
5% long bond yields are historically low outside the 2008-2021 free-money era. Inflation above the 2% target seems plausible, which could push yields higher.
Orin said:
5% long bond yields are historically low outside the 2008-2021 free-money era. Inflation above the 2% target seems plausible, which could push yields higher.
Several factors, like declining money supply and slower population growth, could lead to sub-2% inflation long-term. AI and innovation might also improve productivity and reduce costs.
I wouldn’t go long-term right now.