Mustafa Chowdhury from Deutsche Bank was on CNBC earlier to talk about the $14 billion 30 year US treasuries being auctioned off today. I don't think the anchors asked the right questions. With the yield talk around 4.67%, is there any value given that the two years yield 4.64%.
Clearly as stand alone products, the 30 year does not look so attractive. I don't think too many managed pools look at them as stand alone. I think the framing of the question lacks some understanding of how bond portfolios are managed. The 30 year gives managers another tool to manage duration, convexity and other things managers care about for the entire portfolio.
Adding 30 year treasuries might be a way change some of the characteristics of the entire portfolio. Don't think of the demand for these bonds as anyone wanting an average maturity of 30 years.
As for market impact, I have been saying for a while that one of the reasons that yields went so low was the distortions caused by no new long bond supply. Now that the 30 year is back, those distortions will be unwound. Tough to say how long it will take and there is no way to know how much of this last small push up is because of the 30 year and how much is because of the Fed but this does matter.
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2 comments:
For long term investors, intertemporal hedging demand also plays a role.
Suppose you are young person whose main asset is the present value of future income. You will be making most of your lifetime investments in the future, when you make that income. If interest rates (broadly defined as the yield on all assets) are low at that time, you are screwed and won't make good returns on your investments. So to hedge against this possibility, you invest in long dated bonds today, since long dated bonds will perform quite well if interest rates end up low in the future.
A similar argument can be used to say that young people should invest in stocks (another very long dated asset).
I would be willing to take a bet the "anchors" do not know how bonds work.
Many times in the past, when the curve was inverted, the lay person would always take the "lay-up" and buy the short paper which paid more only to realize when they came due, the rates were lower.
So, common sense says: Buy the short paper---pays more---not tying money up. But....the boys with the big bucks obviously are buying long.
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