Treasury Bond Term Structure is Shifting. Look out Below.
Intermediate-term Treasury bond yields are rising, flattening out the yield curve into a hockey-stick shape.
My earlier prediction of declining short-term T-bill yields did not materialize, but my prediction of a flattening curve did materialize.
Rising oil prices and geopolitical risk, notably the Iran war, are pressuring security prices. I expect losses in long-term bonds as yields rise.
I’ve written about the capacity for rate reductions in short Treasury bills in my article entitled Fed Cut Interest Rates by 25 Basis Points. They Could Go for Another 75 Basis Points. In this new article I review where the yield curve was before the December cut and where it is now. Short term interest rates did not decline. Instead, intermediate term interest rates increased, flattening out a U-shaped term structure. What does this mean for bond investors?
Before the December rate cut
Here’s how the yield curve was shifting before the rate cut:
The U shape was flattening out, and I predicted that it would flatten even more because short term T-bill yields would decline to 2.8%. That decrease in T-bill yield didn’t happen, but the curve did flatten because intermediate rates increased.
Now, after the rate cut
The yield curve is no longer U-shaped. It’s hockey stick-shaped:
Investors in intermediate term Treasuries in the 2-4 year range have lost money because interest rates for those maturities have increased to flatten out the yield curve.
What next
The war with Iran is driving up oil prices which in turn affects the prices of both stocks and bonds. Fear motivates selling risky assets and causes decreases in security prices. Bond prices, especially at the long end of the curve, will decline, causing yields to increase. Investors will lose money.
My next prediction is that the long end of this hockey stick will extend upward, so be forewarned and protect yourselves. Who thinks I’ll be right this time?
If I’m right, both stocks and bonds will suffer losses. Bonds will not soften the blow of a stock market correction. Treasury bills will.
SEE ALSO:
• Confidence in Target Date Funds is a Mistake Waiting to Happen
• 90% Outperformed Warren Buffett in His Last Year. So What?
Ron Surz is president of PPCA Inc and its DBA Target Date Solutions (TDS), co-host of the Baby Boomer Investing Show (BBIS), creator of Soteria SaaS, and author of the books “Fixing Target Date Funds” and "Baby Boomer Investing in the Perilous Decade of the 2020s." TDS licenses target-date fund usage of Ron’s patented Safe Landing Glide Path® (SLGP) that actually protects beneficiaries as they approach retirement. Individual investors can follow the SLGP at Age Sage, an educational interactive website. The BBIS educates Baby Boomers on the risks and rewards in contemporary investing.
Ron can be reached at Ron@TargetDateSolutions.com.