'Bond Yields Are So Low, There's No Profit'

Includes: IEF, SHY, TLT
by: Eddy Elfenbein

I often hear investors whine that since bond yields are already so low, there’s almost no room to profit.

Actually, there’s lots of room. If a perpetuity (a bond yield that never matures) sees its yield drop in half, then that means the price doubled. That’s even true if the yield drops from 1% to 0.5% or even 0.0001% to 0.00005%. It’s always a double.

My point isn’t to suggest that you should expect perpetuities to double. Yesterday, Kelly Evans of the WSJ tweeted that it wouldn’t surprise her to see the 30-year T-Bond below 3%.

Right now, the 30-year is yield about 4.25%. A move from 4.25% down to 3% equals a rise in price by about 25%. Don’t let the math fool you. Big gains can still be made from low yields — assuming yields continue going lower.