Salient to Investors:

Gary Shilling writes:

  • In May, when the Fed first started talking about tapering, 10-yr yields jumped to 2.72 percent in early July from 1.64 percent on May 1 and 30-yr yields to 3.68 percent from 2.83 percent.
  • Most investors hate Treasuries because they believe that serious inflation and rising yields are inevitable, and because they do not understand them despite their unquestioned quality as investments – since the early ’80s, a 25-yr zero-coupon Treasury, rolled into another 25-yr bond to maintain the maturity, beat the S&P 500 on a total return basis by 5.3 times, despite the stock rally from 1982 to 2000.
  • Stock prices are much more difficult to assess because they depend on the business cycle, conditions in a particular industry, legislation, the quality of company management, M&A possibilities, corporate accounting, pricing power and products.
  • It was only individual investors’ extreme distaste for stocks after the 2009 rout that precipitated the rush into bond mutual funds that year. Brokers dislike recommending Treasuries because commissions are low, and can be avoid ed entirely by buying directly from the Treasury.
  • Investment bankers did not like me to be on client visits if my forecast was for lower interest rates because projections of higher rates would encourage corporate clients to issue bonds immediately instead of waiting for lower financing costs.
  • Managers of bond funds do not rejoice over bond appreciation when yields fall because  they worry about reinvesting their interest coupons and maturing bonds at lower yields.
  • I never buy Treasuries for their yield but for their appreciation. The 30-yr bond increases 19.7 percent, the 10-yr increases 8.6 percent, for each 1 percent drop in yield, but the losses are bigger on longer maturities if rates rise.
  • I prefer Treasury coupon and zero-coupon bonds because of their enormous liquidity, mostly their non-callability, unlike corporates and munis, and their status as the best-quality issues in the world.

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