By Michael Lebowitz
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In the social media era, where attention spans are measured in seconds, and 300-500 words are considered a “readable” article length, my articles can be too much for some readers at three to four times that word count. Instead of writing another 1,500- to 2,000-word treatise on why I like bonds, I present a “readable,” sub-500-word elevator pitch for U.S. Treasury securities.
My simple elevator pitch
My view of the attractiveness of bonds can be honed into an elevator pitch. It boils down to a straightforward question: Is this time different?
Have the 40-year pre-pandemic economic trends reversed, and the economy’s inner workings changed permanently over the last three years?
More specifically, are slowing productivity growth, weakening demographics and rising debt levels about to reverse their prior trends and become a tailwind for economic growth.
If you think, as I do, that the last three years were an economic, fiscal and monetary anomaly, then the opportunity to earn 4% or more on a longer-term bond is a gift. I think yields will revert to extremely low levels when the pre-pandemic economic and inflation trends reemerge. Negative interest rates are not out of the question.
Is this time different?
If you believe this time is different – and the next three years and beyond will be like the last three years – then bonds will be a poor investment. For that to be true, the fiscal, monetary, and behavioral actions we witnessed in 2020 and 2021 were not one-off events related to the pandemic.
Fiscal deficits are high but normalizing and well off the pandemic amounts. The Fed is forcibly reversing its excessively easy pandemic policies. Revenge spending is still occurring, but consumer spending behavior is slowly reverting to normal levels. Further, the excess savings from the pandemic will be gone in the coming months, and recent extreme credit card usage will end.
Real yields are tempting
Real yields, the yield after deducting implied inflation rates, are tempting if you believe the trends of the pre-pandemic years stay intact. Today, investors can buy a risk-free, five-year Treasury note and earn a real yield of over 2%. That is generous compared to the .55% average of the last 20 years and the -.20% average rate since 2010.
To keep this “readable,” I reiterate my simple elevator pitch question: Is this time different? Is a continuation of the economic, fiscal, and monetary activity of 2020 and 2021 more likely, or will the trends of the prior 40 years resume?
In fewer than 500 words, I hope I succinctly informed you that I do not believe the trends of the last 40 years will reverse. Consequently, bond yields well above implied and historical inflation rates are a great opportunity.
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