The U.S. Department of the Treasury issues debt obligations, including 10-year Treasury notes. The debt obligations range in length, from short-term to very long-term. Debt that has an obligation of less than one year is called a bill; debt obligations from one to 10 years are called notes; and debt obligations that are longer than 10 years are called bonds. The 10-year Treasury note is important as many other interest-bearing securities are priced based on this heavily traded security. Since many investors around the world watch the rates of the 10-year Treasury note for signs of economic strength or weakness, it is important for all investors to be aware of the interest rate environment.
Could U.S. debt be reaching a breaking point?
In the chart below of the U.S. 10-year Treasury, it looks like yields on U.S. bonds have bottomed out and are rising again.
As the chart below shows, in June of 2012, the U.S. 10-year Treasury note traded close to $135.00. Now 10-year Treasury prices have broken below $131.00—a decline of almost three percent.
As the prices for 10-year U.S. Treasuries declined, an interesting event took place on the chart. The 200-day moving average of the price of the U.S. 10-year Treasury note moved above its 50-day moving average—a bearish signal according to technical analysis. The last time this bearish crossover took place for the U.S. 10-year Treasury was at the beginning of 2011.
Chart courtesy of www.StockCharts.com
Yields have fallen off a cliff for the U.S. 10-year Treasury. In mid-June 2007, 10-Year Treasury notes were yielding about five percent. Now they only yield two percent! That’s a decline of about 60%. People (savers) living off the income generated from their U.S. bond holdings were destroyed as the yields collapsed.
But something is happening now. The yield of the 10-year Treasury has moved back to two percent from the low of 1.4% recorded near the end of July 2012.
Since the beginning of the financial crisis in 2008, U.S. bonds have gained extra attention by investors and institutions alike as they fled stock markets and ran for the “safety” of U.S. bonds. As a result, they drove the price of U.S. bonds such as the 10-year Treasury higher and caused yields to go down significantly.
In June of 2007, before … Read More
With the uproar in Europe continuing unabated, the rush into the safety of bonds through “safe” countries like Germany and the U.S. is doing much to distort the mechanism of the financial markets, throwing a monkey wrench into the investment strategy of many people. With the yield of the 10-year Treasury now trading at approximately 1.55% and nations like Germany having 10-year yields of 1.2%, one must be careful not to make the common mistake in one’s investment strategy of running for cover and not looking out into the horizon.
When taking into account inflation, investing your money in 10-year Treasury notes at just 1.55% could be a very costly mistake. You are essentially willing to make no money after inflation and perhaps even lose money. The rush into the 10-year Treasury does not consist of small retail investors, but rather large institutions that are parking their money until a better opportunity arises. As a small retail investor, I would caution against following the large funds; in fact, I like to go against them. They are like massive boats; very slow to adjust once they start moving in one direction.
One area that makes sense over an investment horizon greater than a decade consists of stocks that pay a good dividend yield. There are plenty of stocks that exceed the yield of the 10-year Treasury in addition to the possibility of capital appreciation. One area that most investors overlook is that of preferred shares. Preferred shares offer a higher dividend yield than common shares and carry some preferential treatment. Because they don’t trade as often, many investors aren’t aware of … Read More
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