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  • Martin Sosnoff

Treasuries Negative Yield Curve Ignored, But Still Dangerous

This graph on Fed Funds shows violent swings in Fed Fund rates, cycle-to-cycle. Note rates fell below 2% in the recession of 2001-’02 and again in the mortgage banking fiasco of 2008-’09. Conversely, the country has endured a Fed Funds posting of over 10% when inflation was a problem. 

Should anyone but academic economists care about the Treasury's market's negative yield curve? Currently 10 – year Treasuries trade to yield 45 basis points below 2-year bonds at 4.6%. Such disparity has gone on for a couple of years, but scant notice or Street commentary. 

I own a basketful of the Treasury notes of 7/25 which I consider a gift of the market. 

Strangely, investment outlook patter largely avoids this issue of a sizable negative yield curve in Treasuries. Why do players hold onto this10-year paper which I consider tarnished in the marketplace? Such bond holders must expect a broad collapse in Treasury bond yields. 

Investors might agree that our quiet FRB is about to cut money market rates sizably from 4.5%. Maybe, in the regulators’ world they expect diminished inflation at 2.5%, not 4.5%. The FRB could argue that prime mortgage rates don’t belong now at 8%.  What’s happened to the 4.5% mortgage? It’s what families need to see. Home insurance rates already wax too punitive for homeowners.


In the corporate bond market, bonds show a more prescribed pattern, particularly in the high yield sector with low credit ratings. I own a broad list of industrial BB rated bonds with average duration of five years. Such paper remains sensitive to where we are in the business cycle, and sensitive to inflation numbers. 

When inflation runs over 4%, high yield corporates do step up into the 7% yield range, a 300 basis point premium over Treasuries. For prospective holders, the concept is to make sure you’re being compensated for any inflation risk. 

Ten-year Treasuries now don’t hold their own in comparison with high yield corporates. Unless you expect a collapse in bond yields across the board Treasuries today don’t do their job of yield attractiveness. Yield spread analysis is a must for prospective bond investors. 

My experience is just like in the equity market you never get what you hope for,  a rational and orderly bond spread. Wealth management operators in our major banks stick near to a 5-year duration in their bond portfolios. They don’t choose to forecast interest rates and avoid pretty much high yield bonds as too volatile. They stick pretty close to a five-year duration in their bond holdings. In other words, they are allergic to credit risk-taking. Let someone else own A corporates, unless they’re trading in the eighties. 

Independent Individual investors should be challenging institutional norms in bond investing. I’ve seen preferred stocks with 7% face dividends sell down sharply and yield over 10%. These are great recession plays when your entry point is timely.

Today, individuals should be inventorying 2-year Treasuries, high yield corporates with at least 5-year duration. Assume the FRB is about to ease credit. 

What holders of 10-year Treasury paper are saying to themselves is, is it going to pay to stay long in 10-year paper because we are headed into an economic contraction. As yet, the Fed is too wimpy not to take aggressive action by increasing money supply, cutting short term rates and becoming a cheerleader for economic expansion. (A big, gutsy call)

As a constant tapper of margin, my history with the Fed is mainly gut wrenching dismay. They’ll always take away the punch-bowl when I’m overextended. Consider too, I couldn’t land a $5 million home mortgage at Morgan in the eighties. Obviously, I was termed a gun-slinger, a serious credit risk. 

But Morgan’s branch in Paris carrying a low loan-to-deposit ratio, accepted my request for funds on our villa in Nice. Elton John later bought us out. Our Citigroup home mortgage on our Hudson River property was retired at maturity after 30 years outstanding. 

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1 Comment

George Robertson
George Robertson
Jul 03

I can help - said sincerely. The yield curve you cite is not the actual yield curve in terms of the economy and thereby relationship to equity and other markets. The actual yield curve and the US Treasury market rate curve with term premium. Be useful to talk about this with you.

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