Chicken Little Buys Bonds

Chicken Little has purchased some US Treasury notes maturing in 3-8 years.

Buy Bonds

Historic moves in interest rates

Here is a confession. I love bonds. During my brief time working at Goldman, Sachs & Co., I worked on 27th floor in 'fixed income.' I find that my love of fixed income is not shared. No matter how much effort I put into my lectures on bonds, invariably students literally fall asleep. 

Bonds have been Bone-crushers

For a bond geek, the recent moves in interest rates have been amazing, fascinating, and historic. I own a bond that matures in October 2024, just under 2 years from now. It has lost 7% in value in the last six months. Earlier this week, a 30-year Treasury bond (that I don't own) had lost 51%. These are absolutely stunning, bone-crushing losses in an investment that is supposed to be super safe.  

Why buy now? Do the recent losses in price, rise in yields, mean that bonds can only go up? Of course not. However, the risk/reward of owning bonds has changed dramatically for two reasons. 

First, the yield has risen dramatically. That means that an investor gets paid more, and has more cushion against further rate rises. Consider the change in interest rates over the last two years. 

2020 low1 year agotoday
2-year treasury0.11%0.46%4.33%
7-year treasury0.36%1.40%4.02%
30-year treasury0.99%1.92%4.08%

Two years ago, Treasuries presented return-less risk (and I sold all of my 30-year bonds by March of 2020). Today, treasuries are still risky, but an investor gets paid something to hold that risk. 

Chicken Little focuses on possible losses. If you buy a 2-year treasury today, and hold it for one year, you will have made money unless interest rates double in the next twelve months. Not impossible, but a bet I have just made. 

The world applauded Fed monetary looseness 

Second, I am less afraid of hyperinflation. I continue to believe that the Fed is corrupt and incompetent (see my article, "The Fed is corrupt and incompetent").  I have been an early and persistent critic of the fed - see my 2015 "Abolish the Fed" article.  

As the e-printing presses ran night and day, many people loved the Fed (and "Bubble Ben Bernanke" just won a Nobel Prize). Recently, however, public opinion has shifted as people suffer from inflation that was created by Fed mistakes.  

As the world has come to realize the failures of the Fed, I have become more optimistic that the Fed will not allow hyperinflation. Earlier this year, the Fed was still printing money and had interest rates set at zero. 

I do not have any faith in the Fed, but I am less concerned about hyperinflation than I was a year or two ago. At the margin, that makes me more willing to own Treasuries. 

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