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Richard is the managing principal of QVM Group LLC, a fee-based investment advisor based in Connecticut, with clients across the country. QVM also operates the site and the site QVM manages portfolios uniquely designed for each client on a flat fee basis... More
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  • Vanguard 10-Yr Treasury Yield Forecast 0 comments
    Jun 16, 2010 5:58 PM | about stocks: IEF, TLH

    June 16, 2010

    According to Vanguard projections (made 3/29/10 for, AAII Journal, June 2010, page 7) 10-yr Treasury rates are implied by the current yield curve to be 4.4%, 5.2% and 5.6% by 1 year, 3 years and 5 years into the future. The current rate (June 15) is 3.32%.

    They don't do a great job of explaining just how they got to those projections, but given their huge bond asset base, we think they should be presumed to be well qualified to make the projections.

    They certainly cover themselves well with a disclaimer. Basically, they say you've to make some projection, but the future often unfolds differently. Therefore, broad diversification among bonds is more likely to be satisfactory over time than a narrow focus, which can seem right now, but turn out quite wrong later. --- So their article and this discussion is probably better than doing nothing all, but, as with any forecast, shouldn't be taken as ultimate truth.

    For perspective, they report that historical rates were 4.9% since, 1800, 4.7% since 1900, 7.3% since 1970, and 4.6% since 2000.

    The price implication for 10-year Treasury rates, by our calculation, is for price declines of 9.6%, 16.5% and 19.9% by years 1, 3 and 5.

    That calculation is based on multiplying the duration for the current 10-year Treasury (which is 8.67 years) by the percentage yield change (1.1 * 8.67, 1.9 * 8.67, and 2.3 * 8.67).

    Considering the interest that will be received over the holding period (without reinvestment), the net of price change and interest proceeds would be implied to be losses of 6.3%, 6.6% and 3.4% over 1, 3 and 5 years.

    Those expected interest rate changes are large versus short term history, as the 1-year chart shows..

    However, this 10-year chart of the rates for the 10-year Treasury, shows Vanguard's projections to be very much in the range of rates that we experienced in the period from 2000-2007 (except for a dip below during the last major bottom in 2002-2003).

    This 50-year view of rates for the 10-year Treasury, shows plenty of room for rate increases well beyond Vanguard's projections in times inflationary, stress as we had in the early 1980's.

    Related ETF products: IEF and TLH.

    Holdings Disclosure: As of June 16, 2010, we do not own any securities mentioned in this article in any managed accounts.

    Disclaimer: Opinions expressed in this material and our disclosed positions are as of June 16, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.

    Disclosure: Holdings Disclosure: As of June 16, 2010, we do not own any securities mentioned in this article in any managed accounts.
    Stocks: IEF, TLH
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