The 30-year Treasury bond is rarely mentioned as a great investment option, but one CIO urges you to give it another look.
The 10-year Treasury yield, which has a significant impact on mortgage rates and serves as a proxy for longer-term inflation expectations, and the ultra-short-term fed funds rate, which the Federal Reserve modifies to stimulate or slow down the economy, are two important interest rates that investors usually keep an eye on.
However, Elliott Dornbusch, chief investment officer of CV Advisors, which oversees $20 billion in assets, claims that the 30-year Treasury is currently one of the most alluring investment options available.
The 30-year yield is a strong 4.8%, much higher than the 10-year yield of 4.14%. This is due to the fact that investors typically seek greater compensation for the additional duration risk they assume.
One of the 30-year's most unattractive characteristics, for many, is its extremely long duration. You don't want to be forced to hold the note for thirty years if yields increase and its value decreases.
However, Dornbusch hopes to sell the asset for a profit much sooner. He stated that he anticipates yields declining from present levels for two reasons, which will result in an increase in bond prices.
First, he believes that investors are exaggerating the risk of long-term inflation, partly because of tariffs. He noted that although import taxes raise the cost of goods, they also reduce the demand for services, which balances the inflation equation. It's also a one-time pricing change, at least in theory.
"If you think long term, tariffs are deflationary because they're taking money away from people's pockets," Dornbusch stated. He further stated: "People might not go to Disney, for example."
Second, investors will probably turn to long-term Treasurys for protection if stocks experience a bear market at some point. Those who purchased the risk-free assets at current prices will be able to sell them for a profit as a result of the increased demand for them, which will raise their value and lower their yields. It also serves as a portfolio hedge in this way.
"You could get a return on the 30-year Treasury for the next 4 years that kind of resembles like a 10% return both on coupon and on appreciation, if you have the patience," he stated.
"It also serves as a great hedge for my long equity position." Other bond-market strategists disagree with Dornbusch's perspective.
The so-called "belly" of the yield curve, or mid-duration assets with a term of two to five years, appears to be preferred by consensus today.
This strategy enables investors to lock in yields at roughly 3.5% for the upcoming years while not worrying too much about duration risk in the event that yields rise due to an inflation panic because short-term rates are on a downward trajectory.
However, Dornbusch believes that if long-term yields are likely to decline, you might as well cut an almost 5% coupon in the interim.
"I'm very contrarian and I really like the thirty-year Treasury bond today," he stated. "I think that this idea of inflation in the economy, people will realize the reality of how inflation works and the 30-year treasury yielding almost 5% is extremely attractive."
