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Are U.S. 10-Year Treasuries Overvalued?

Jul. 07, 2017 10:43 AM ETAGG, EDV, TLT2 Comments


  • U.S. Treasuries are the world's most important market.
  • Many experts believe Treasuries are vastly overvalued.
  • Treasuries should be a part of most investors' portfolios.

The world’s biggest bond market continues to perplex even the most sophisticated investors. Longer-term Treasury rates have been falling in 2017 despite a series of rate hikes from the Federal Reserve, frustrating both savers and traders that are set up for the so-called reflation trade. More recently, rates have backed sharply up after the European Central Bank weakly signaled a possible tapering of bond purchases.

U.S. Treasury rates drive so much in finance that it is not a stretch to say that they are “the straw that stirs the drink.” Readers of a certain age will recognize the self-descriptive remark uttered by the famous N.Y Yankee Reggie Jackson back in 1977. Jackson’s comments were later poo-pooed by team captain Thurman Munson. But Jackson had the last laugh being named that year’s World Series Most Valuable Player. Similarly, U.S. Treasuries may be the market’s Most Valuable Input, or MVI, given that it forms the basis of risk-adjusted discount rates, used to calculate the present value of future cash flows – things like dividends, coupons, and rental income.

So, how do investors decide if today’s 10-year Treasury rate of 2.37% is too low, too high or just about right? Like everything else in finance, the answer to the question depends on who you ask. Let us start with the Quants since quantitative investing is so popular these days. Quants typically model interest rates, including Treasury rates, as a mean reverting process. The key parameters are an average interest rate over time and something called mean reversion speed. Essentially, this approach assumes that interest rates have a long-term memory process that asserts itself over some period. Estimating the time it takes for interest rates to mean revert is obviously challenging. However, by this estimate, 10-year Treasury rates look way too low now since a longer-term average,

This article was written by

Chelsea Global Advisors, LLC is a market research and strategic advisory firm based in New York City. We are in the process of becoming a Registered Investment Advisor in the State of New York. The Firm follows an empirical, evidence based approach to analyze global capital market conditions and make asset allocation recommendations. In addition, the Firm provides solutions to complex challenges facing buy and sell side participants in the areas of capital optimization and operational efficiency and responses to emerging regulations. We also provide advanced capital markets and financial services training courses. The Firm began operations in 2013 and is led by Edward Talisse, Managing Director and Chief Executive Office.

Analyst’s Disclosure: I am/we are long TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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