Go Long 10-Year Treasuries, Go Short 7-Year

1) In one sense, I had an unusually productive Saturday. I built two models — one for a critique of the PEG ratio, and one for a model of the Treasury yield curve. I will be posting later on these, and I am really jazzed on both of them. It is not often that I get one impressive result in a day. Today I got two.

I’ll give you one practical upshot for now, if you are an institutional bond investor: go long 10-year Treasuries and short 7-year. We are very near the historical wides. If you are like me, and can live with negative carry, dollar duration-weight the trade, so that you are immune to parallel yield curve shifts.

2) Barry Ritholtz had a good post called, 5 Historical Economic Crises and the U.S. The paper he cited went into five recent crises in the developed world, and how the current U.S. situation stacks up against that. Here was my comment on one of the areas where the U.S. situation did not seem so dire, that of the run-up in government debt:

On the last point about the increase in the debt, what is missed is that a lot of the government debt increase is hidden by the non-marketable Treasury bonds held by the entitlement programs. Add that in, and consider the unfunded promises made at the Federal, State, and municipal levels, and the debt increase on an accrual basis is staggering.

We do face real risks here. The rest of the world will not finance us in our own currency forever. Oh, one critical difference between the U.S. and the 5 crises: We are the world's reserve currency, for now.