I was going to write an article for the Seeking Alpha community, but I changed my mind. Here is a graphic I created that I want to share here:
I exaggerated in the title, as the 10-year Treasury isn't the worst investment ever, but it sure is likely to be a dumb one. I think it has sucked in hedge fund macro types who aren't thinking about the long-term. It's easy to get sucked into the idea that there is no risk because of Operation Twist, but let's not forget that interest rates rose during QE1 and QE2.
As I look at the chart of the yield over the past 50 years, I see a parallel to 2009. Look how far the rate is from the 200dma - rather extreme. If we continue to see 5% nominal GDP, I would expect rates to rise to about 3%, perhaps higher. The downside price risk is quite high. If the yield were to rise from the current 2.07% (on the 2.125 of 8/15/21, which trades at 100.5) to 3.07% over the next 6 months, the price would decline by over 8% (total return would be about -7%). I guess that's not the "worst investment ever", but it sure stinks. What if the yield were to rise to 4%? The price would fall from 100.5 to 85. Ouch.
The way I look at it is that one can hold the 10-year to maturity and earn a cumulative 22% if coupons are reinvested. I think stocks can do that in two years, perhaps sooner with a little luck. I bet not too long from now, people will be wondering what we were thinking allowing the 10-year to trade below 3%.
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