Good article about long dated low coupon Treasuries and a good explanation on how bonds fair-value rates are determined:
U.S. Treasury rates in the long-end of the curve are 100 basis points too high relative to a fair-value model. The risk-adjusted opportunity in long-dated, low-coupon Treasuries is attractive.
In fact, I take his point one step further and argue that given everything going on in the world, going long Treasury securities – and especially long-dated ones with low coupons – offers a very attractive hedge against bad macroeconomic and geopolitical outcomes, and one that pays you a 5% yield to boot.
There are two pillars to this argument. A global fair-value model for interest rates suggests that 10-year U.S. rates are 100 basis points above fair value. Models could be wrong, obviously, and it is possible that despite this historically high “mispricing,” interest rates could go higher still. But if rates do go higher, they are unlikely to go much higher from current levels, which makes the upside-downside of going long Treasuries attractive, especially so for long-dated, low-coupon ones, for the reasons I discuss below.
Fair value for 10-year rates
The QuantStreet fair-value rates model is estimated using the last several decades of data from eight major economies: Australia, Canada, Germany, Japan, Norway, Switzerland, the U.K., and the U.S. The model relates the level of nominal 10-year rates in each country to their last-12-month (LTM) GDP growth, LTM inflation, the LTM inflation from 12 months ago, the most recent unemployment rate, the most recent current account level as percent of GDP, and the most recent government debt-to-GDP ratio. Based on the historical relationship between these variables and 10-year nominal interest rates in these countries, the model determines a fair value for the 10-year rate. Comparing the prevailing 10-year rate against this fair value estimate gives a sense of market mispricing.
Morningstar evaluation: These are the 3 top guaranteed retirement incomes
John Rekenthaler, director of research at Morningstar, recently evaluated three other ways to generate guaranteed retirement income – Treasury bonds, TIPS ladders and annuities – to see which is best. The answer? It all depends on inflation and life expectancy.
https://finance.yahoo.com/news/treasury-bonds-vs-tips-ladders-131720815.html
Bonds over Stocks for the next 10 years:
The average 2024 Wall Street S&P 500 forecast is for a gain of 6.50% next year. In the past, a 6.50% expectation, while slightly lower than historical averages, was a no-brainer when choosing between stocks and sub-2.5% bonds. Today, that calculus has changed dramatically, with interest rates offering respectable yields.
Suppose you think yields will rise or fall based on your inflation and economic growth forecast, or you want to create a table of various return scenarios. In that case, one can approximate returns closely by multiplying the duration of a bond with the expected change in yield. Add to that price return the expected coupon payments over an assumed period, and you have a robust estimate of potential return.
... stock returns over the next 10 years may likely be lower than bond returns. Stock prices and valuations will change, and with it, the 10-year outlook will respond. The prospective returns for stocks and bonds may differ vastly in three months or three years. But for now, not only are bonds much easier to understand and forecast, but they also offer a comparable, if not better, return prospect.
The forecast of bonds better than stocks could be true, but last year Wall Street forecasters were saying that stocks would be down in 2023 and instead stocks are up quite a bit, there never seems to be accountability for bad forecasts. I would love to see a chart of these prognosticators' predictions vs. actuals. I'll bet it would be no better than throwing darts.
There is still a lot of disbelief that inflation is tamed, so while the very bottom seems to be in on bonds, I think rates will be coming down much more, so I feel like they are still a solid investment.
Still Holding I Bonds? Jan. 1 Could Be Your Ideal Date to Cash Them In
KEY TAKEAWAYS
- I bonds enjoyed a historic heyday last year between May 1 and Oct. 31, due to their initial 6-month rate surging to 9.62%. But if you bought during this time, your return has since dropped to 3.38%.
- In the meantime, CD rates have soared, with dozens of the best nationwide CDs offering record rates above 5% APY. That makes now a smart time to move I bond money into a federally insured CD.
- Though you can cash out an I bond anytime after one year, there's a sweet spot on the calendar for maximizing your I bond earnings before you withdraw.
- Based on your I bond's issue date, we'll tell you the best month to withdraw. And then the best day to cash in is always the first of the month. For many current I bond holders, your ideal withdrawal date is coming up on Jan. 1.
10 year US Treasuries' are back up to 4.5%. Not as good as in Oct 2023 but higher then the past 15 years or so (not counting 2023-24). So is it another good time to look at replacing some of your bond funds and/or lowering your stock allocation by buying US Treasuries (directly or from one of the big investment houses and letting them go to maturity)? Financial Samurai seems to think so. He is a fairly well know financial/retirement investing pod caster:
At a ~4.2% 10-year bond yield, (it is now 4.5%) we're now at the popularly espoused retirement withdrawal rate where you will maximize your take and minimize your risk of running out of money in retirement.
If you can earn 4.2% risk-free, that means you can withdraw 4.2% a year and never touch principal. Therefore, perhaps you want to have an even lower stock allocation than 50%. Here's a more detailed post about how risk-free rate affects safe withdrawal rates in retirement.
But remember, you're not me.
I'm more conservative than the average 46-year-old because both my wife and I are both unemployed in expensive San Francisco with two young children. I cannot afford to lose a lot of money in our investments because I'm determined to be an SAHD until our daughter goes to kindergarten.
https://www.financialsamurai.com/suggested-stock-allocation-by-bond-yield-for-logical-investors/
Vanguard's Total Bond Market Index fund (VBTLX) 10 year return is 1.49%:
U.S. Treasury's
As of June 6, 2025
10 year US Treasuries' are back up to 4.5%. Not as good as in Oct 2023 but higher then the past 15 years or so (not counting 2023-24). So is it another good time to look at replacing some of your bond funds and/or lowering your stock allocation by buying US Treasuries (directly or from one of the big investment houses and letting them go to maturity)? Financial Samurai seems to think so. He is a fairly well know financial/retirement investing pod caster:
At a ~4.2% 10-year bond yield, (it is now 4.5%) we're now at the popularly espoused retirement withdrawal rate where you will maximize your take and minimize your risk of running out of money in retirement.
All depends on your context. For someone like me who is vulnerable to inflation risk, you'd also need a prayer that 10 year inflation doesn't end up being more than the 'built in' 2.1% or that 4.2% might not be worth very much.
The yields on 20 year TIPs are about 2.6% real at the moment, which is very attractive. Unfortunately that is past my longevity, but even 10y are about 2%.
10 year Treasury now at 4.48% minus the 2.1% which I assume you are saying is the present inflation rate = real 2.38%. From what I've read TIPs are a good idea if you think the inflation rate will average 4% or higher. I don't think that is likely, at least not staying that high for very long. So I would assume that for you building a US Treasury bond ladder for what ever length you need, would be a good thing for you. Maybe - maybe not???
10 year Treasury now at 4.48% minus the 2.1% which I assume you are saying is the present inflation rate = real 2.38%. From what I've read TIPs are a good idea if you think the inflation rate will average 4% or higher. I don't think that is likely, at least not staying that high for very long. So I would assume that for you building a US Treasury bond ladder for what ever length you need, would be a good thing for you. Maybe - maybe not???
No that is not the present inflation rate. The link I embedded in my comment takes you to the the Fed Reserve "break even" 10y inflation rate (the difference between 10y nominal treasuries and 10y tips), which is 2.31% today. It is posted every day. But the 2.31% breakeven rate means if you bought a 10y treasury and a 10y tip at today's rates on the secondary market, and inflation 10 years from now turned out to be 2.31% over the interim, the "real" yield on the two would be identical. If it turns out to be more than 2.31%, your treasury would be worth less than your TIP, and if inflation turns out to be less, your Tip would be worth less. Not sure where your 4% came from, but thanks to the fed there is no need for guesswork on the breakeven expected inflation "built into" treasuries. Some split the difference and buy half and half. Others like me prefer the slightly lower expected rates of TIPs because inflation is a bigger "deal breaker" for my retirement than 20 basis points or so of expected return that treasuries often have over tips. Especially given the lack of effort by politicians on decreasing the escalating debt.
When approaching or in retirement, the thinking often changes from chasing returns/wealth accumulation to taking any risks to a comfortable retirement off the table. We can mitigate inflation risk by buying TIPS and knowing our budget/cash flow. We can mitigate sequence risk by using a conservative asset allocation and bucketing. We can mitigate risk of future much higher tax rates or one spouse passing earlier than expected by doing Roth conversions. We can mitigate longevity risk by smoking, drinking, skydiving. Ok skip that last one! Mitigate longevity risk by properly accounting for long-term care costs, and testing for that in one of your scenarios. Term life if necessary. Sure, chasing returns and building wealth can mitigate lots of that, but that's certainly more risky, more stressful, and less predictable than the other tactics.
@jkandell Good explanation. I don't remember where I saw the 4% comment, and I can't find it now, so I withdraw my comment. I have found several good links to TIP overviews:
https://www.whitecoatinvestor.com/tips-treasury-inflation-protected-securities/
https://tipswatch.com/tips-in-depth/
When approaching or in retirement, the thinking often changes from chasing returns/wealth accumulation to taking any risks to a comfortable retirement off the table. We can mitigate inflation risk by buying TIPS and knowing our budget/cash flow. We can mitigate sequence risk by using a conservative asset allocation and bucketing. We can mitigate risk of future much higher tax rates or one spouse passing earlier than expected by doing Roth conversions. We can mitigate longevity risk by smoking, drinking, skydiving. Ok skip that last one! Mitigate longevity risk by properly accounting for long-term care costs, and testing for that in one of your scenarios. Term life if necessary. Sure, chasing returns and building wealth can mitigate lots of that, but that's certainly more risky, more stressful, and less predictable than the other tactics.
Great list. Having just retired, I find myself needing to learn a whole new set of things than I did in acquiring my wealth.
I would second everything you listed, and add two more aspects of mitigating risk as one switches from accumulation to decumulation.
With regard to longevity risk, in addition to what you said, leverage social security (have the largest income earner claim later than their partner, and have the biggest wage earner postpone SS till 70 or a bit beyond what pralana and opensecurity say maximizes returns). Think of that lost optimization as longevity insurance. And, even consider commercial annuities if and when one approaches 80yo if longevity is still an issue. Finally, don't ignore cognitive decline: your plan for when you're 80 needs to be different than your plan now, even at the cost of basis points. None of us will be using Pralana when we're 86.
An aspect you didn't mention I would argue is important is to mitigate interest rate risk of your bond funds used for essential expenses via immunization. That is, match the duration of your bond funds to your liabilities. This can be done by adjusting the mix of a short and long bond fund over time. Otherwise, poor luck can decrease the worth of your bond funds from their ytm exactly when you need to sell them to cover expenses. Total bond funds are great in accumulation stage, but individual TIPs and duration-matched bond funds become more important in the decumulation stage. (This can be part of the bucketing you mention for controlling sequence of returns.)
@jkandell And just when we put in all the work and think we have it nailed, new legislation will come and blow it all up again 🙂 It is, again, a reason I often push for a simplistic (although non-optimized to every dollar) approach for those that have non-complex financial situations and aren't very high net worth. Less complex, hence less VERY hidden cost/risk of expensive mistakes, especially as we get older.
Tax optimization of asset location can be a great fun challenge when we're younger (when it should be done, most effectively, as stated by others) but another source of landmines as we age. For many (more normal) folks, keep it clean, determine your ideal asset allocation based on risk tolerance, income needs, timeline, and make all your accounts/locations the same, use Mode 1 and less worry about future legislation upending all your work in that complex strategy.
And again, less traumatic for a grieving spouse to pick up and run with if they aren't the financial driver in the family. Less likely they'll be thrown to the wolves out there.
US bond market braces for surge in Treasury supply in second half
BOSTON (Reuters) -The bond market is bracing for up to $1 trillion of additional U.S. Treasuries supply in the second half of the year once lawmakers address the looming debt ceiling problem, possibly permanently, top rates strategists said on Tuesday.
A surge in Treasury supply could increase repurchase, or repo rates, which refer to the cost of borrowing short-term cash using Treasuries or other debt securities as collateral. Higher Treasury supply typically saturates the market with additional collateral, which can initially lower repo rates due to excess supply. However, if supply exceeds demand substantially, it may lead to higher repo rates as lenders demand more compensation for holding larger volumes of securities.
What are "higher repo rates"? Does that mean yields on new US Treasuries will go up??
https://www.yahoo.com/finance/news/us-bond-market-braces-surge-201640964.html
@hines202 I hear you. I basically started that way, actually, even 50/50 in every account. Then at some point I started putting all my stocks in taxable and all my bonds in IRAs (with Roths split), thinking I was clever. But now as I start decumulation I'm stuck with a huge gain if I ever sell equity in taxable, kind of locking me into too high an asset allocation and also too much domestic, and difficulties knowing how I'll manage things as my AA changes over time.
But I agree with your sentiment.
Hey, I'm the weirdo that doesn't even choose to use anything other than "average" gain for my mutual funds, because I want to keep things simple and not track "lots", and any potential tax gain loss now will just mean more taxes later. (I'm not planning on a legacy.) If I do any tactical gain or loss harvesting it will be at average gain, not super efficient. And I'm very reluctant to trust Pralana's recommendations for Roth conversions given so many unknowns in the future to make it work, and it's complicated. I don't see a hardly any IRMAA in Pralana either way. So I think simplicity is underrated.
