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Yes, 3% Treasuries Are A Bargain With 8% Inflation

Michael Dolen profile picture
Michael Dolen


  • First quarter was the worst on record for U.S government bonds.
  • With the recent 8.5% CPI print, most think the 10-year at sub 3% is crazy. Even more so for the 30-year at a similar yield.
  • A year or two ago, consensus could not even fathom $80 oil, despite the basic math on supply pointing to a shortfall, irrelevant of a war.
  • In a similar fashion, the math points to lower yields ahead and it's being ignored. In the coming years, low inflation and even deflation are real possibilities.
  • Regardless of whether or not we get low or no inflation, here's why today's rates are closer to a ceiling than a floor.

Senate Republicans Hold News Conference On Inflation On Capitol Hill

Kevin Dietsch/Getty Images News

Quotes for the Dow Jones, S&P, Nasdaq, Gold, Crude Oil, and Bitcoin. That’s what you will see on the top left of Seeking Alpha’s homepage. The 10-year Treasury? Nope. Forget the German Bund, UK Gilt, or Japanese Government Bond.


This article was written by

Michael Dolen profile picture
I prefer to buy long term winners when they have short term problems. You may call them falling knives, I call them being on sale. Most of what I buy is with the mindset of never selling, or at the very least, holding several years. With a long to very long term horizon, volatility doesn't bother me too much. I've been investing for over 20 years now, through 3 major bubbles (dot com, GFC, and the present). I saved up $500, the minimum deposit required to open an UTMA brokerage account, in middle school. I convinced my grandpa to co-sign the account, despite the fact that he nor anyone else in my family owned stocks or any other investments (aside from CDs). Investing has been my foremost interest for as long as I can remember. While classmates may be reading Harry Potter, I was into Security Analysis and the like. Although I grew up trying to emulate the Buffett style, I morphed into more of a Munger mindset. Today, probably Mohnish Pabrai would best reflect my philosophy of favoring undervalued, while not outright ignoring generational growth opportunities. I have been self-employed my entire life and for the last several years, have been investing full time. Prior to that, for 6 years I ran an online business in the credit card space. I started it the same month Bear Stearns went under and despite my poor timing and the fact that all my customers (banks) were in trouble, I maintained profitability every quarter and never took any outside investments or loans. Eventually I sold it to a publicly traded internet company.  While running that business, the cash flow coming from it afforded me the opportunity to make high risk, high reward investments in private biotech companies. Two went public. Life sciences is a great interest/hobby of mine but because it evolves so rapidly and requires immense amounts of continuous due diligence, it is something I now only do on the peripheral of my portfolio. While the vast majority of what I buy may be considered boring, I do make investments in some highly speculative stocks.  Lastly, while I mostly agree that you generally lose more money preparing for a crash than you do in an actual crash, I like to keep a healthy cash allocation on hand for those opportunities when everyone else is panicking. For those funds I prefer munis and in fact, have been betting on long duration for nearly a decade now. Contrary to the prevailing mindset this last decade, there's far too much debt to sustain higher rates for any meaningful amount of time. I have been on Seeking Alpha for at least a decade but did not start writing on here until 2020, due to boredom during covid. Even more than parking, I despise paying for investment research. As such, I will only write about one article on here every 30 days, which is the minimum required to maintain SA Premium access. I would rather slit my wrists than charge you for my content, so you won't see a marketplace service from me. Raised in Michigan, live in Manhattan Beach, CA.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of EIM, MUC, EDV, TMF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not a financial advisor. This article is general information and for entertainment purposes only. It should not be misconstrued as being investment advice. Please do you own due diligence regarding any security directly or indirectly mentioned in this article. You should also seek advice from a financial advisor before making any investment decisions.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (148)

TAKE A RATE HIKE profile picture
so glad to have you sharing your opinion about bonds, while being one of the few authors out there on SA not trying to monetize in the marketplace
Michael Dolen profile picture
@APOW thank you and yes, I am extremely annoyed how this place has just turned into a portal where you first pay for a premium membership, only to then be given teaser articles to try and get you to subscribe to a bunch more subscriptions.
Stiffmeister profile picture
Just came across this article, and I'm glad I did.

Very informative and a great explanation of the mechanisms driving capital gains/losses in bonds.

For someone not well versed in bond investing, like myself, this drove home that there's more up/downside to treasuries than just the coupon. Much appreciated👍👌

Now I'm off to become the next Bill Gross🙃
GetaClueorgetglue profile picture
Great analysis and call. Sure does seem like rates have topped well ahead of the fed jawboning of 3-4%. Doesn't matter what the fed does now, longer rates are going to continue acting like we are going into recession.
While I broadly agree with the author that rates will come down because of deflationary pressures in a few years, the reality is that nobody knows for sure.

Keep a balanced portfolio, buy dividend paying solid companies and diversify bonds between corporates, treasuries and munis.

Problem solved.
@No way Jose

100% agree.
I've owned the physical precious metals as well for 20 years now. (still always accumulating rain or shine)
Cool story bro. Selling OTM calls on TLT is what is truly bond like. There is no way we see rates drop substantially anytime soon.

Sold $125 and $120 August calls a few weeks ago for ridiculously high premiums.
GetaClueorgetglue profile picture
@SomeGuy14 wait til you see how fast TLT climbs near 125
I live in NYS. (Another glorious "tax you until you cry uncle" state)

I buy equal blocks of NRK, PNI & BNY once a week, every week. (as I have been for many years now)

Triple tax free.
I'll take that sh*t all day long.
Unrealized gains, unrealized losses, etc. Doesn't matter to me.
Up, down, up, down....it's irrelevant to my long term end game goal.
GetaClueorgetglue profile picture
@Archman Investor What if rates went to 6% in 5-6 years or even higher? Not that i think its possible but at some point there will be a great reset. These muni funds will get crushed and your return will be very little.......
LegoMyAlpha profile picture
@Archman Investor You live in NY. Why does your portfolio live in NY?
That could happen. In my opinion if it does the country and economy might have bigger problems on it's hands.

I'm not so concerned about long term return as they are purely 100% tax free vehicles as part of my overall portfolio and retirement plan.

If they can maintain (to whatever extent possible) their distribution policies that's more important to me.
Diesel profile picture
I could see us starting an era of Japan-style deflation sometime in 2023 or 2024.
GetaClueorgetglue profile picture
@Diesel no doubt thats coming. No other way out
@Diesel Yep. So buying munis or treasuries at 3-5% makes sense.
@Diesel If you believe Avi Gilburt's blog, first a big uptick toward 5500 S&P the then the bottom drops out in late 23 or early 24. I tend to agree with him and you. Deflation baby, here we come.
GetaClueorgetglue profile picture
Would a leveraged funds usage of Preferred Shares as their asset for leverage be a far safer fund compared to one that is tied to FFR using repos and the like? Cause the holders of the preferred shares should be taking the hit. Correct?
GetaClueorgetglue profile picture
Anyone know what a muni CEF such as NUV should yield compared to 10 yr, 20yr treasury? Cause in November it had a 3.2% yield and after cutting that dividend 10% the yield is now around 3.7% but the 10 year is up 1.6% to 3.1%.
Seems this fund isnt discounted enough. Back in November the muni yielded about 1.7% higher than the 10 year. Now its only about .6% over the 10 year. And the 10 year looks headed higher over the next 2-3 months most likely.
Michael Dolen profile picture
@GetaClueorgetglue While not specific to any fund, I can tell you that back in the 00's munis often had yields BELOW treasuries of comparable duration, because people were willing to accept less yield due to the tax benefit. That changed post financial crisis.

With treasuries you are competing against foreign demand and that suppresses yield. No foreign demand for munis.
GetaClueorgetglue profile picture
@Michael Dolen Oh wow, good to know.....
With all due respect, you must be blind. I´m invested in TBT and made 50% YTD. Will change to TLT & TMF -- for a short period --when TLT is down to $105.
I wonder what yield TLT needs to achieve in order to stop falling?
GetaClueorgetglue profile picture
@pawel_81 more like when do stocks crash and stop TLT from falling. LOL
@GetaClueorgetglue ^^^^^^ this *or* when Fed steps in like they did in Feb 2020. Fed is far more concerned about bond market compared to anything else and historically have always stepped in when investment grade credit spreads start to blow out. I fully expect that to happen before 10yr yields 5% stuff will be breaking well before then IMO.
i agree with your theory, but i think it can go below 105 and will buy then.
sell puts afterwards.
Great contrarian food for thought for a bond bear such as me. However, to continue supporting our artificially cheap debt-fueled standard of living requires at least the fig leaf of everlasting productivity gains. Due to many factors productivity gains, or at least their rate of growth, may be over ... if so, party over.
GetaClueorgetglue profile picture
@Invest2Surf Good point. Are you still bearish? How high of rates can the market sustain. Based on this article it aint much higher than current long rates.
@GetaClueorgetglue Still bearish, but have started to increase holdings of no- to low-leverage muni CEFs such as NXP. Taxable equivalent over 5% for most brackets at this point. Not sure what the market can sustain, but the sleeve is starting to unravel so we may soon find out.
GetaClueorgetglue profile picture
@Invest2Surf What do you like about NXP compared to EIM? Higher rated bonds?
What about UBT?
Today can only be described as a massacre in the long term Treasury market . Stop trying to pick bottoms . There will be an oversold rally , but wait .
If the author did not think that the trend lines had been broken previously , then maybe todays action will change his mind.
@r cohn Yep, bloodbath day. Fed came out yesterday again making the (potential) mistake of labeling inflation as transitory. Yeah sure, everything is transitory on a long enough timeline!!! Meanwhile the bond vigilantes hear that and realize they need to do the work the Fed should be doing. This is kinda what Dr Lacy Hunt warned about in his latest newsletter. A Fed not committed to keep monetary policy oriented to fight inflation is bad news for TLT.
A major factor in the price decline of Treasuries is the lack of foreign buyers. After hedging for currency risk , buying Treasuries is not currently profitable for foreign buyers.
Inflation is hardly isolated to the US . The German producer price index is up over 30% over the last year
Prospects are for energy and food prices to continue to soar because of the sanctions policy.
GetaClueorgetglue profile picture
You seem to very knowledgeable about rates. Can you help me understand the risk of the leveraged used by many of the muni CEFs. I know many have 37-40% leverage but I don't know how to quantify how they affect monthly dividends based on rising rates. How safe are the funds? Can they drop 25% more? Like if i think the 30 yr will stop at 3.5% how will that impact the leverage aspect of these CEFS? Thanks
I rarely invest/trade those funds , so I can not comment
There is a good discussion by Alerian
Just google “ A lesson on leverage in municipal bond closed end funds .”
I do know that these funds are selling at a discount to NAV . Why ?
I also know how that municipalities rarely go bankrupt , but fears of problems present problems for these funds due to relative lack of liquidity
GetaClueorgetglue profile picture
@r cohn Appreciate the article. Thx. At what yield would you buy a CEF like NUV?
Even a better buy today!
What about MBS / mReits ?
The Fed had been the main buyer . Who is going to replace the Fed?
@r cohn Exactly. Fed really screwed up in continuing to buy MBS all the way to right now. Utterly ridiculous, though it may be all intended Fed wanted housing bubble to grow again due to wealth effect.
GetaClueorgetglue profile picture
@r cohn The ponzi shall continue once the economy is in recession. Fed balance sheet could be 20 trillion before this game is over. This is what concerns me about Munis. Fed was buying 500 billion in munis which enabled yields to stay down like treasuries. If the fed goes full retard (ponzi)( Never go full retard), what does the end look like? Weimar republic? stocks UP! Faang The US Dollar is so big how does this play out???
It's quite valuable piece I have to admit. What we tend to overlook is that market is indeed pricing extreme CPI pressures and rate hikes + QT. The bonds as most of the market (equities, crypto) have been heavily sold in the past months. But as the market is pricing more and more CPI, we focus only on the one side of the equation: supply. But we ignore future demand and this may decline - China is already working on that and if you look on the prices of the commodities and then you recall the sentence: the cure for high prices are high prices. We observe GDP dropping, dollar squeeze, CPI sky-rocketing, fear levels going up. We already had yield curve inversion, it looks quite bad now and it will look worse. It all rises probability of some short-term deflationary period. I am quite sure we will observe high CPI throughout this decade, but short deflationary shocks are highly probable. And this is where we might be heading now, therefore long on treasuries might be now a good trade. Same applies to gold.
3.06% on the 10 year is hardly pricing in extreme CPI pressure and will not choke off demand .Much higher rates will be needed to do so.
The mistake that those suggesting buying bonds is simple - you are assuming the last few years of super low rates are indicative of what rates should be . Both in nominal and real terms rates in the last few years are an anomaly .
@r cohn I do not agree, because following your paradigm you buy treasuries to beat CPI with the yield. Given the current market and complexity of financial institutions, their risk management, you simply buy treasuries to gain on capital. Second and very important factor is that we are entering a decade of chronically increased CPI. This is mostly to devalue government debts. Let me just remind you that in 1940s the treasuries yield was pegged. It is quite naive to believe that yields will follow CPI in the long term - it is not what big players want to achieve.
Emerald profile picture
MD, thanks for the very informative article. I too have hedged my stock exposure with PCK (PIMCO CA tax-exempt CEF) vs. using long Treasuries. Although I am down in the gain/loss category, I continue to hold PCK, as I believe rates will hit a ceiling over the next year, let's say 3.5% on the ten year. The Fed will cease/slow their quantitative tightening at some point as inflation moderates back to 3%.

I also agree with your comment about "one more dance". Confiscating/freezing another country's reserves, although a feel good move against Russia, tells the world that we are very short term minded and effectively willing to have other major economies push for a world currency basket. When that happens, our standard of living will fall. Cheers
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