Are Treasuries Worth Buying?

This week the Treasury plans on auctioning a record $115 billion in longer maturity bonds and TIPS, including two, five and seven year notes. Ninety billion of bills will also be sold.

click to enlarge Should you get in?

The six month chart above shows how poorly 1 to 3 (SHY), 7 to 10 (IEF) and 20+ (TLT) treasuries have performed. The longer out you were, the greater the underperformance.

Ten and twenty notes are currently yielding 3.7% and 4.53%, respectively. Two and five notes are yielding an unbelievably low 1.05% and 2.57% yield. It is hard to imagine chasing such poor yields.

Now look at the following six month graph of UUP versus SHY.

If you are a foreign investor and you bought 1 to 3 year notes (SHY) six months ago, you're under water. You sell them and you not only lost on your investment, but 8% on the currency trade. If you'd had the misfortune to buy 20+ notes, you'd have lost 15% on the trade plus an additional 8% on the currency trade. Half of U.S. Treasuries are owned by foreign investors. The tiny yields are not worth the risky currency trade especially because the dollar is under pressure. It is unlikely that foreign investors will keep stepping up to buy risky bonds without being rewarded with higher yields.

In order to attract buyers, treasury yields must climb. Buyers of this week's auction will be disappointed with their purchases six months from now.

Disclosure: Short TLT