My Thoughts on Treasury Yields and Why You Should Care

4 мар. 2023 г.

5% of on a 1-year US Government Bond Yield?

I never thought that I would see the day.

Many of us have grown up in a low rate world. Today, you buy a US Treasury bond, hold it for a year, and get 5%. That's more than most stocks yield in dividends, probably nearly double or triple the average. However, it's said that the S&P 500 averages 7% a year or so. Nonetheless, factor in recession fears and the trade becomes even more interesting.

What are government bond yields?

A government bond is a debt security issued by a government to raise money. When you buy a government bond, you're effectively lending money to the government in exchange for interest payments. The yield on a government bond is the return you'll receive on your investment, expressed as a percentage. So if a bond has a face value of $1,000 and a yield of 3%, you'll receive $30 per year in interest.

Why are government bond yields rising?
I can list out those reasons for you below:

1. Inflation
2. The Fed is purchasing less Treasuries
3. Economic growth is slowing, which means taxes will be less

What are the major implications?
Opportunity costs.

I'll say it again: Opportunity costs.

Everything that is bought, sold, and/or traded now must be weighed against this 5% yield. Do you want to buy Apple for the next year at its current valuation or take a risk to get 5% on a Treasury bond? You can substitute Apple for anything and everything that comes to mind from construction investments to crypto.

Do I own any bonds?

NO. I missed it and am only now paying attention. Will I potentially add some to my portfolio? 5%? It's possible. That's why I wrote this idea. I want to share my thoughts and add a few of these symbols to my watchlist.

I look forward to reading your comments!