The U.S. Treasury Department is bringing the 20-year bond note back as it wrestles a record level of government borrowing, but what does that mean for investing in bonds?
The coronavirus outbreak has led to a mountain of government spending as it tries to prop up the economy during a substantial lockdown, and the Treasury Department noted it expects to borrow about $3 trillion during the second quarter of 2020, which would be a new record.
“The 20-year Treasury will be issued for the first time since 1986, and it’s being brought back to help fund the swelling deficit. The U.S. was already staring down a $1 trillion deficit this year, and that was before the pandemic began,” Banyan Hill Publishing’s Clint Lee said. “Now the deficit is expected to hit $3.7 trillion this year due to all the fiscal stimulus to combat the economic impact of the pandemic.”
Because of this, the department is planning to shift away from Treasury bills and focus on spreading debt out using a longer maturity strategy the next few quarters.
Banyan Hill’s Clint Lee
Lee, who is a Chartered Financial Analyst and Chartered Market Technician specializing in behavioral finance, gave some insight into the methodology behind this long-term strategy, and what it could mean for investing in bonds in the long-term.
“The government wants to go long to take advantage of interest rates hovering near record lows. The risk of shorter maturities is that investors revolt against the scale of the deficits and rising debt levels in general, and they could do this by demanding higher interest rates down the road. That’s the reason for longer maturity issuance — lock in low rates now for longer,” Lee said.
Some Treasury yields popped off on the news Wednesday. The benchmark 10-year Treasury note’s yield increased by 5 basis points to 0.72%, the highest it’s been since April 15. The 30-year Treasury gained 9 basis points to 1.41%.
Is Investing in Bonds a Good Idea Right Now?
Yields have been hovering around record lows since the coronavirus crash in late February sent investors to the safety of bonds. It’s been a killer for savers trying to generate some income as they head into retirement, but the last 20 years have actually been good for long-term Treasurys.
Banyan Hill CMT Michael Carr’s Chart of the Day Thursday actually shows long-term Treasury bonds have outperformed all other asset classes on average since 2000.
But Lee doesn’t think investing in bonds is the way to go right now — especially if you are close to retirement.
“While low rates are a boon for governments running record deficits, they are absolutely punishing savers, and especially those near retirement that need to generate income. That’s why The Bauman Letter has recently focused on a combination of income-producing stocks with high-quality balance sheets, or stocks in high-growth sectors that stand to grow their dividends over time,” Lee said. “Because investors need alternatives when deciding how to generate income.”
Be sure to check out The Bauman Letter for all the tools you need to increase your investment earnings while also protecting yourself against various threats to your privacy and wealth.
Investing in bonds may not be the best call right now, so looking elsewhere for greater yield could be the better action..
• The Bauman Letter Editor and Economist Ted Bauman’s YouTube channel is also taking off. Check out Bauman and Lee’s newest video discussing five crisis-proof sectors that will crush the market as the economy recovers.
