top of page
  • Martin Sosnoff

The Rate Spread On Treasuries Is Crazy

That nothing changes in financial markets is called the naive forecast because markets intrinsically prove volatile, changeable, and hardly predictable. Normally, I bypass Treasuries, high yields, except when the sector is under great stress, either inflation is running wild, or the country faces deep recession and poor fixed charges coverage on low rated bonds. What we see today

A year ago, I violated all my disciplines and put on my books both 2- year and 10-year Treasuries. Normally, yield curves stay positive: Long-term Treasuries yield at a premium to2-year Treasuries. For whatever reason, and believe me, the bond market can go nutty. 10-year paper yields for decades were deeply negative by over 100 basis points above their 2-year counterparts. When the 2- year yield pressed above 5% I bought a basket full. Of late, my 2-year paper has rallied, now yielding 5% down from 5.19%. This may seem minimal but it’s not if you have lots of zeros in your position.

Meanwhile, the 10-year Treasury tightened its negative yield curve to 2-year paper from over 100 basis points to 40 basis points.

When I see a major variance change in yield disparity, I look for a reason and then ignore it or agree with the variance. I chose to disagree, but wouldn’t back my disbelief with more real money. It remained a mind bet. Better to lose your mind then your money. Yield spread change on the 10-year notes is worth pondering. Has seriously reversed its outlook and now sees more inflation ahead.

The point in such a change is that when historical yields change you change or at least review your position.

There is a bottom line, when 2-year Treasuries yield 5% equivalent to money market rates. MLP’s presently yield 7%, but at some risk to a declining economy. When I dropped my pen and mused on negative yield curves I felt something was missing. I’m a stock market player. What about high flyers? Like Meta, Google and Tesla, et al?

So far, growth stocks remain in their esoteric world of quality earnings progressions. The price-earnings ratio for Google, Meta, Amazon, and Apple can hold their premiums to the market as they generate earnings momentum. Whether long term Treasuries yield 3.5% or 5% is irrelevant.

I forged ahead, adding to my positions in Amazon, Apple and Microsoft. To hell with bond yield variances. Gimme more energy like OXY where I’m concentrated in a stock at 10 times earnings.

If I were really bullish, I’d put on an enormous spread, long 10-year Treasuries and short 2-year paper.

What everyone misses or forgets is the inherent volatility in bond markets. Treasuries yielded 15% when Paul Volcker was on the war path over the country’s inflation.

Bank preferred stocks like Bank of America sank down to 5 bucks in the bank meltdown of 2008-’09. This chart on 30-year Treasury bond undulations is scary, with yields ranging from 15% down to practically nothing. Institutional money managers following their traditional debt-equity construct last year chopped off 16% when both stocks and bonds declined in tandem; you can lose half your capital in bonds that are viewed as safe investments.

A faulty entry point in Exxon Mobil can cost you 50% of your capital, too, yet regarded as a safe and secure dividend paying house.

160 views0 comments

Recent Posts

See All

Apple and Berkshire Overplayed And Overowned

By now, everyone knows Warren Buffett owns a big chunk of Apple and is happy with it. But, as a stock, Apple has churned past year with no gain to speak of. You woulda done much better in General Moto


Post: Blog2_Post
bottom of page