Wednesday, February 24, 2010

The Short and Long-Term Case for Treasuries

Trader's Narrative (hat tip Abnormal Returns) presents why Treasuries may outperform over the long term:

Presented with those basic facts, it is not difficult to put the pieces together. The average household’s wealth is very underrepresented in fixed income. Some of that has to do with the strong equity culture in the US. You simply won’t find the same comfort level with equity ownership and trading in Europe for example. The key is that there seems to have been a moment of epiphany where the average Joe and Jane realized that their balance sheet was very lopsided.

No doubt that eureka! was sparked by several painful events: the real estate meltdown, the stock market bear market (on heels of the 2000 bear market, giving a zero decade long return) and the economic meltdown which either reduced or eliminated incomes (through the steep rise in unemployment). The result is that the babyboomers, facing a looming retirement, have retreated into the posture of capital preservation and income generation.
And here's why they may outperform over the short term... 'Long Treasuries' have not had negative performance OR underperformed their intermediate counterparts in back to back years since the inflation scare of the late 1970's / early 1980's.

Long Treasury Index

Long Treasury Index less Intermediate Treasury Index

All that said... with record Treasury supply coming to market, a Fed likely to err on the side of higher inflation, the end of quantitative easing, and the questioning of future purchases coming from abroad... this (like any other investment these days) is unfortunately no sure thing.

Source: Barclays Capital


  1. And here I was getting ready to follow Nassim Taleb's advice that every human being on the planet s/b shorting UST's...

  2. Can't sleep. Black swans will eat me.