Investing.com - Financial Markets Worldwide

Thoughts On Current Bond Valuation

ByBaskin Financial Blog
Published 05/30/2012, 01:30 AM
Updated 07/09/2023, 06:31 AM

Only a month ago, investors were OK with the world. The North American economy was strong and growing, unemployment was slowly coming down and corporate profits were at record levels. How quickly things have changed. Now we have so much to worry about, we have forgotten what it feels like to be in a confident environment. As a result, investors once again have sought refuge in the arms of government bonds. Demand for protection has been so strong that government bonds are at record high levels and offering puny returns.

When we are depressed, we forget what euphoria feels like, and when we are euphoric, nothing can get us down. Bond investors have forgotten that the pendulum is always swinging.

With U.S. and Canada 10-year government bonds offering yields well below 2%, risk-free is now risky. Risk-free bonds should equal nominal GDP plus inflation. With U.S. GDP running about 2%+ and inflation at 2% or so, 10-year U.S. Treasuries should yield 4%. At 1.75%, the yield of a 10-year U.S. Treasury bond today is more overvalued than a share of Facebook.

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