What we see is that the current yield is well below the five year average (bringing up concerns there is a "bond bubble"), but we can also clearly see that the market is already pricing in the yield to rise to a level that is higher than its five year average in ten years.
If a reversion from these lows is already priced in (past its five year average), I don't see how we are in a bubble (i.e. "bubbles" are not supposed to be priced into the market).
Source: Federal Reserve
Source: Federal Reserve
Good question! A partial answer might be that the forward yield prices in uncertainty rather than just an expected value. The Cleveland Fed has a couple of research pieces along these lines regarding TIPS spreads:
ReplyDeletehttp://www.clevelandfed.org/research/commentary/2010/2010-5.cfm?WT.oss=inflation%20expectations&WT.oss_r=2670
Note that while I think 10-year Treasuries are a terrible value, I do not see any classic characteristics of a bubble.
curious as to what you currently see as a better value?
ReplyDeleteFor a 10 year holding period, I prefer gold, silver, large-cap US equities, small-cap Japan, Asia ex-Japan, ex-China, Mexico, global energy stocks, and probably some others. For the next 5 years, I mostly like cash for its optionality, physical gold using GLD as a hedge, and for income some MLPs, a handful of large-cap high dividend growers on dips, distressed credit (via mutual funds), and short-duration Ginnie Maes. And whatever opportunities arise along the way.
ReplyDeleteso basically everything else... fair enough
ReplyDeleteLove this post Jake, very mind bending.
ReplyDeleteGreat comments Namazu!
I read a thought-provoking piece on asset class valuation at the GMO Website. It's called Back to Basics, by Ben Inker, published 11/8.
ReplyDeleteGMO link here (free subscription may be required):
ReplyDeletehttp://tinyurl.com/39s3fzy