No “Game Change” in Long Bond Yields

Technical analysis website StockTiming.com offered the following in their free Tuesday update yesterday:

Very few things happen that can be a “game changer” in a macro sense.  

However, there is a potential “game changer” that is at the cusp of signaling one of the most important changes in 15 years…

It is the current challenge to the 15 year down trend on 30 year Bond yields.   Fifteen years is a pretty long time, but that could come to an end if today’s 30 Year Bond Yield chart breaks out to the upside…

It would mean the end of the down trend, higher mortgage rates, and a sign that inflation is on the way. 

Such an event would be a “game changer” because it would cause duress in many economic sectors, along with the necessary re-evaluation of future economic forecasts.  This could result in a large scale rotation of stock sectors and rising commodity prices in 2011.

They offered the following chart as evidence:

 

Source: StockTiming.com

The risks of inflation and rising mortgage rates are always worth thinking about. But we’re clearly on record as believing that the deficit, debt, and inflation phobes have it all wrong on long term rates. We also have argued that the recent back up in treasury yields presented a nice opportunity for income oriented investors and prudent asset allocators. And if yesterday’s Treasury market action is any indication, our thesis appears to be the more credible one at the moment:

 

Admittedly, one day is nothing to hang your hat on. But recent market action seems to indicate that the long bond yield is looking for a temporary (as always) equilibrium in the low to mid-4′s: 

And while the trend since the end of summer has clearly been up…

 

…it’s important to keep it in context. Looking at a five year chart, and taking into account the flights to safety that occurred during the financial crisis (large circle) and the echo crisis in Europe (small circle), there still hasn’t been a notable trend break in 30 year Treasury yields: 

 

Source: Yahoo!, Symmetry Capital Management LLC

As we’ve pointed out previously, on top of the slow and grinding recovery that inevitably follows a balance sheet recession, the world is entering what could be a long period of “right shoulder level” rates of economic growth and financial asset returns. As a result, we’re unlikely to see (except in a few regions or countries) the boisterous numbers we’ve been used to since the baby boomers and their predecessors appeared, starting way back in the mid-19th century (primarily a function of technological innovations like plumbing and internal combustion, and medicine later on).

So those double digit long term Treasury rates of the late 1970s and early 1980s were indeed a “once in a lifetime” opportunity. And while lower nominal yields might take some getting used to, consider that at a constant reinvestment yield of 4.5% (and a zero tax rate), an investment will double in value in only about 16 years. That’s not an unreasonable return in a “right shoulder level” world.

Of course, if the deficit hawks get their way and Congress starts raising taxes out of an irrational fear of the debt and deficit boogeymen, it could take over 25 years for a security compounding at 4.5% to double…

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (“SCM”) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results.  This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you.  You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein.  The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.  At the time of writing, some clients of the firm hold long positions in TLT and/or individual Treasury securities, while neither the firm nor its principals hold positions in any securities mentioned.