BUYING THE 10 YEAR AT 1.66%: THE NEVER ENDING SEARCH FOR THE GREATER FOOL

4/29/13

Holly Liss, ABN AMRO Clearing’s director of Global Futures was on Bloomberg Radio just a few minutes ago talking about the upside potential of the 10 year treasury.   Ms. Liss is one of the brighter traders out there, or at least one of the brighter traders who appears on the financial media, so I generally try to listen when she speaks.

Ms. Liss likes the 10 year treasury, which currently yields 1.66%.   While she says that she can’t see the 10 year trading to a 1.00% (Gulp!) yield, as some bond bulls are arguing, she said she could easily make the case for a 10 year yield in the 1.30% to 1.40% range.   Her argument is straightforward:   the economy remains slow, Fed quantitative easing (“QE”) action will continue and will be skewed heavily toward the long end of the curve, a skew that will be exacerbated by the continuation of Operation Twist.   As regular readers know, I don’t feel equipped to make short term calls on any market (See my two 4/15/13 posts, GOLD:  YES, I’M SCARED…BUT I’M STAYING and SO WHY HAS THE STOCK MARKET DONE SO WELL OF LATE?) and suspect that most people have a similar shortcoming, including, perhaps especially, those who claim the degree of acumen necessary to make such trading calls.  Nonetheless, it’s hard to argue with Ms. Liss’s logic, especially when she was careful to argue that she is not advising anyone to buy a 1.66% ten year and hold it to maturity; she is advising only a trade at 1.66%.   If she is right and the 10 year does trade to the 1.30% to 1.40% range, this trade will, of course, prove to have been very lucrative.

But think about this for a moment….

Again, Ms. Liss is not advising buying the 10 year at 1.66% and holding it to maturity.  Very few people with even a reasonably firm hold on their senses would advise such a strategy; if earning 1.66% for 10 years turns out to be a good, or even a not all that disastrous, exercise in positioning, we have a lot more to worry about than the conditions of our treasury portfolios.  

But by buying even for a trade, one is making the implicit assumption either that one is buying value for the long run or that a greater fool will come around quickly enough to relieve one of what appears to be a very malodorous long run investment.   In other words, if we buy the ten year (or any instrument, for that matter) despite not liking it for the long run, we are betting that someone, the greater fool, must believe that the 10 year is a good buy at a yield presumably even lower than 1.66%...or that the fool in turn can find an even greater fool to take him out of his position at an even more absurdly low yield.

This is a dangerous game of musical chairs.   I will let others who are confident of their ability to move quickly when the music stops play this game.   As a long term investor, I want no part of either aspiring to a miserably low yield for 10 years or betting that I can find someone with even more misplaced trading hubris to take me out of what I know, and presumably everybody knows, is a rotten long term position.   I’ll leave that to the clever people.