#69 S2N: Bond, 10 Year Bond is the Name

Author

micksonmatch
May 28, 2024

S2N Spotlight

I am sure most of you haven’t dissected the intestines of a bond total return, so today we will feast on 104 years of unadulterated US Government 10-year bond returns.

Performance Chart (log returns)

Performance Summary Table

Monthly Distribution Chart

Monthly Returns %

Annual Returns %

Rolling 10-Year Returns

Summary Please

Let me start with the obvious, which may not be so obvious. If you buy a US 10 year bond and hold it for 10 years, you will receive a guaranteed return equal to the yield that you purchased the bond for, and at the end of the 10 years, you will get your capital back. So if you buy the said bond for $1 million at a yield of 4%, you will receive annual coupons of $40,000 each year and $1 million at the end. However, if the bond you bought drops in price to $900,000 because the yield goes up to 5% and you decide to sell, then you will lock in a $100,000 loss. Holding on to maturity will guarantee a return.

Buying and holding for 104 years will give you an almost 5% compounded annual return with relatively low volatility. What is also noticeable in the chart above is the drawdown. We have experienced the largest drawdown in history; starting on August 4, 2020, we have dropped a maximum of 23.66%, with the current drawdown sitting around 18%. So buyers of 10 year bonds on that date are still very underwater if they want to sell now.

The main point I wanted to convey with this analysis is that long-term certainty can come at the cost of short-term uncertainty. I am currently more attracted to buying short-term bonds with yield curves inverted.

S2N Observations

As I live in Australia which many call the lucky country, I thought it would be interesting to see how Lucky the All Ordinary Index has been relative to the SP500. It seems not nearly as lucky as the property market.

I have shown the outperformance in 2 different ways. A relative performance chart going back to 1980 and as a ratio. There doesn’t appear to be mean reverting qualities to the ratio so I am not suggesting any trades. The one argument I could make is that the US outperformance has probably gone too far so it might narrow in the short to medium term.

A final thought on Trumps promise at the weekend Libertarian conference. It is unusual for a non-member to address the audience but Trump told the audience between a mix of boo’s and applause to vote for him. He then raised one of the Libertarians main campaigns the release of Ross Ulbricht.

Trump promised to pardon him if he is voted into office. I read years ago “American Kingpin: The Epic Hunt for the Criminal Mastermind Behind the Silk Road” by Nick Bilton. What a fascinating book. I have followed the Ross Ulbricht story closely ever since. He has been sentenced to life in prison with no parole. I stopped following his tweets that his wife shares with his supporters. It was too depressing. He has been incarcerated for more than 10 years. I am a believer in repentance and giving someone a second chance. He has been a role model prisoner and has done so much good for his fellow inmates. I am not condoning what he did, he was completely out of control and would stop at nothing to keep the ship on course. I do however feel sorry for him and feel he has done enough time.

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