Before one is seduced into buying some five year, one should remember that the average real-yield for five-year notes (versus cpi):

Over the past 10 years: +103 basis points

Over the past 20 years: +215 basis points

Over the past 30 years: +321 basis points

Over the past 40 years: +240 basis points

Currently: 1 basis point.

Instead of buying a five year note, one's time may be better spent watching the scene from Das Boot when the U-boat sinks to crush depth. The sounds of the hull pressure is an apt soundtrack for the current contortions of the yield curve. Despite the bearish observations above, if life follows art, the bond market may be able to surface noch einmal by blowing out the ballast tanks after the refunding … and then limp home…

Tyler McClellan writes:

Well, the geometric return to t bills for all developed countries int he 20th century was about .5% .

The return for longer dated bonds was about 1%.

Over the past 30 years inflation has gone from 10% to 2%. By definition then, monetary policy was sufficient to lower money rates of inflation. Negative real returns to bonds were consistent with modest inflation in the developed world for a 20 year stretch of the twentieth century. And historically the incredibly high real money rates from 1980 to 2000 were more anomalous than any low real rates today or in the past.

Let me make my observation another way. How do you make money being short a two year bond unless short term interest rates are raised? Isn't a five year bond a two year bond plus a three year bond?

By the way, one trade I do like because it is not that negative carry unlike other flatteners, is a real yield curve flattener. (Or just outright buying twenty year tips if they get back to 2%.)


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