Redrick Terry:
It is now time for 4 Your Money, we’re joined by Nate Kreinbrink, financial advisor at NelsonCorp Wealth Management. Nate, welcome back.
Nate Kreinbrink:
Thanks for having me again, Redrick.
Redrick Terry:
Absolutely. So as the new administration gets underway, the latest pick for Treasury Secretary has generated some buzz in the bond market, what can you tell us about that?
Nate Kreinbrink:
Sure. Well, generally the Treasury market isn’t actually known a lot for change and innovation. However, recently Janet Yellen, who is President Biden’s nominee for the Treasury, reignited this topic of issuing longer term Treasury bonds. More specifically, a 50 year maturity. Now currently, the long end of the Treasury market consists of a 10 year, 20 year, and 30 year issue. However, with an increased debt load, and Democratic’s majority being so slim in the Senate, it might not be possible for them to do as much in terms of raising taxes as they would like.
Nate Kreinbrink:
Now in order to finance this increasing debt, longer term treasuries like this may be the next best thing. So, possible it could become more of a priority than it has in the past. Now with that said, the demand from the market would still need to be there.
Redrick Terry:
So what would that look like, relative to the current structure to the market?
Nate Kreinbrink:
Well I think we have a chart that kind of goes over this. So this chart shows the Treasury yield curve as it exists today. Now this curve simply shows the different maturities of bonds on the horizontal axis, with the corresponding yield on the vertical axis. Now, in most cases, different maturities on this chart slope upward as it moves from left to right. Now this makes sense, as the longer you lock up your money, the more return you would want to demand from it. Now there are a few things to note on this current curve, and that is that the near term maturities, which are those that are under two years or so, have extremely low yields, which probably comes to no surprise to anyone with a savings account, or money in CDs.
Nate Kreinbrink:
Now, the middle of this curve from about two years to 20 years steepens quite a bit. From then, though, that long end of the curve seems to flatten back out somewhat between about 1-2%. It’s this flattening at the long end, with a difference of only about 0.5%, between the yield in a 10 year bond, and a 30 year bond, that really makes this 50 year bond, or issue, so attractive to the government.
Redrick Terry:
I see it certainly, so how could this impact investment decisions?
Nate Kreinbrink:
Well the market has always considered U.S. debt to be one of the safest out there, so Treasury bonds usually, are generally interest rate [inaudible 00:02:39], so when only rates are considered, longer duration instruments have much more pronounced price movements for these corresponding changes in interest rates. Now it’s important to keep in mind, that as interest rates rise, bond prices fall, and vice versa. So as interest rates fall, bond prices rise. A rough example, so if the current yield on a 10 year Treasury fall by about 1%, the price might actually increase by 7-8%.
Nate Kreinbrink:
Now if you compare that to a 30 year Treasury, where a 1% decline in rates might generate a price increase of over 25%. So, because of this type of convexity, and given the current low interest rate regime that we’re currently in, a 50 year maturity could theoretically have price moves in the 40+% range, now this dynamic will help increase diversification, if used thoughtfully, and maybe provide another tool in the arsenal, when looking at investment decisions.
Redrick Terry:
Good stuff as always Nate Kreinbrink, thanks for being with us today.
Nate Kreinbrink:
Appreciate it, thanks guys.
Redrick Terry:
No problem, and if you missed any part of our discussion, we will make it available to you, at OurQuadCities.com.