The bond markets have displayed a lot of volatility as of late. For good reason, and everyone seems to have now given up trying to predict when central banks will finally cut interest rates. With ten-year treasury yields now at 4.5%, a sense of disenchanting calm has fallen upon the markets, and the question, is should we be loading up here?
It seems a no-brainer. Lest we forget we were grateful to get less than half of the current yields for a very long time, not that long ago. The other benefit of having long term government bonds in our portfolios, is the protection they give us should equities ever take a major tumble. However improbable that may be, getting paid is a lot cheaper than having to buy downside volatility products, even at these low levels.
Of course, the risk is that central banks would have to raise interest rates. If we bought ten-year treasuries here and yields were to jump to say 6% for example, we would lose about 15% unless we hold the bonds to maturity. However, the chances of that happening are quite low, as governments can’t afford the interest they are currently paying to finance their deficits. Remember when inflation was transitory?
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