Chas Craig
BridgeTower Media Newswires
In a previous column I discussed how the very low interest rates of recent memory have led many to avoid bonds. This is a conclusion worthy of revisiting for, while bonds are not obviously attractive, they are also not obviously unattractive. Today’s column builds on that prior work with a look at long-dated Treasury securities.
It will probably surprise many to learn that the SPDR Portfolio Long Term Treasury ETF (Ticker: SPTL) is down a lot more year to date (twice as much) than the SPDR S&P 500 ETF Trust (Ticker: SPY), down 28% compared to a 14% loss. As a reminder, bond prices move inversely to interest rates, and interest rates have moved a lot higher in 2022, with the yield on the 10-year Treasury Note going from 1.5% to 3.7% now.
A graph of the Copper/Gold ratio plotted against the 10-year Treasury yield can be found at https://en. macromicro.me/collections/51/us-treasury-bond/2272/coppergoldbond. Upon viewing the graph, one can see that the relationship has been historically instructive and especially tight in the post-Financial Crisis era. This is intuitive in that copper, an industrial metal, typically increases in price relative to gold, a precious metal, during times of robust economic conditions, which, all else equal, tend to also be periods of upward pressure on interest rates and vice versa. Holding Copper/Gold constant, the implication is that roughly 2% is the appropriate level for the 10-year Treasury. If this happened, which it may not, it would result in price upside resembling in magnitude the downside experienced for long-dated Treasury securities this year.
So, if the above relationship holds prospectively, there would be downside in long-term Treasury yields (i.e., upside in bond prices), upside in the price of copper or downside in the price of gold. Ultimately, the normalization of this relationship, if it comes to pass, would likely be a combination of each. Therefore, some investors have determined that terming out some bond exposure at current yields is prudent based on factors including the Copper/Gold ratio in addition to the analysis provided in the most recent column which discussed how inflation-adjusted bond yields and bonds’ attractiveness relative to stocks are near post-Financial Crisis highs.
Some question the wisdom of investing in long-term Treasury bonds at a time of a yield curve inversion (i.e., shorter maturities yield more than longer maturities). For example, a two-year Treasury currently yields about 0.8% more than a 10-year Treasury. The reason is that in two years, when those choosing the shorter-term bond option go to reinvest the maturity proceeds, the prevailing interest rate environment could be lower. In fact, that is what the bond market is signaling as the most likely outcome via a yield curve inversion. Additionally, inverted yield curves have tended to precede recessions, during which the general level of interest rates tends to fall along with economic activity.
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Chas Craig is president of Meliora Capital in Tulsa (www.melcapital. com).
