Wednesday, May 18, 2011

A Bond Market Meme

There seems to be a conventional wisdom forming that long-term interest rates in the United States are as about as low as they can possibly be.  For example, this is from an article in today's Wall Street Journal:
"Rates are so low it's hard to see them going much lower, but it's easy to imagine them going higher," said Kevin March, chief financial officer of Texas Instruments.
And this is from a post at Brad DeLong's blog:
It is certainly true that most of the time when the yield spread is high the way to bet is that long-term bond rates are coming down and long-term bond prices are going up. But somehow I can't see U.S. nominal interest rates falling much lower than they are now.

I don't buy it.  Why? Note this fact: The U.S. ten-year Treasury bond pays 3.18 percent, whereas a ten-year Japanese government bond pays 1.16 percent.

No, I am not predicting the United States is about to become just like Japan.  But it is not inconceivable.  That is why buying long-term bonds now is not a crazy investment strategy, and selling them (as many companies are now doing) is not at all a sure thing.

Addendum: Another noteworthy fact about bonds is that they have recently been negative beta assets.  (You can verify this fact with
this link.)  Their hedging properties also make buying bonds a reasonable investment strategy.