US ten-year bond to stay above 2%

Yield at time of writing – 2.16%

With its yield surging over the past two weeks, today provides a good opportunity to update my previous high conviction recommendation to short US ten-year Treasury bonds, in expectation of higher yields.

Since my last update on 13 May, the yield has risen by 26 basis points and now appears entrenched above the 2% level. The recommendation therefore remains very much intact.

The recession of the early 1990s was a punishing event; born out of the stock market bubble that ended in an abrupt one-day crash in October 1987. Not only did the recession change workplace behaviour permanently (out of fear for losing one’s job), but it also brought an end to a long era of genuine private-sector inflation. If the seeds of private-sector disinflation were planted during the 1987 shares crash, they became entrenched during the early 1990s recession, and US ten-year Treasury bonds] began what was to become a 25-year fall in their yield (see today's chart originating from the yield peak in October 1987). For those that survived that recession, the following two decades of falling yields undoubtedly had a beneficial effect on general living standards, and planted a house price boom that created a great deal of family wealth. 

However, this 25-year fall in yield had to come to an end eventually. In my view, this end occurred when yields hit 1.75%, with a six-month period from June to December 2012 marking the floor. Ten-year yields are now poised to rise to at least 3.5% and for the first time in nearly a quarter century, I'm beginning to sense a return of some genuine private sector inflation. It will be interesting to see how central banks and politicians react to this. The world sorely needs a return of some inflation (to deflate away its debt burden); let's hope they collectively realise the need to relax these arbitrary inflation targets of around 2%.

For investors unsure how best to trade this rise in US ten-year yields, my fund has used the iShares Barclays 10-20 Year Treasury Bond Fund as a preferred means. They are traded in the US under ticker code TLH, and are readily available to short.

Recommendation: Stay aggressively short. Target yield 3.5%.

US Ten-year Government Bond yield chart

 

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CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen.