35th Anniversary of Bull Market In Long-Term US Treasuries, the Best Risk-Adjusted Investment in Modern Capitalist History

By: Jas Jain | Sun, Sep 18, 2016
Print Email

Next month would be 35th anniversary of the bull market in long-term US Treasuries. The yield on 30-Year US Treasuries peaked at 15.2% in October 1981 and has been steadily going down since and is headed to below 1% in the next 2-3 years. Adjusted for risk, there has been no investment in the history of modern capitalism, for 400+ years since the founding of Dutch and English East India trading companies, which has been as rewarding as the investment in the long-term US Treasuries for the past 35 years.

For this 35-Year period, 30-Year US Treasuries have yielded significantly more than the inflation rate. Add to that the capital appreciation in the bond price the purchasing power of the dollars invested in long-term Treasuries 35 years ago, with coupons reinvested, has multiplied more than ten fold! One can buy more than ten times the gold, or crude oil, than one could have bought with the money. At any time in history a safe investment that has multiplied the purchasing power of savings this greatly would be considered a miracle and we are living thru this miracle.

Gross Ignorance of Treasuries Among Investors

Very few people know that on a total return basis the 30-Year bonds have significantly out-performed S&P 500 for the past 18 years and the past 9 years, periods during which we have seen bubbles and bursts in the stock market. Very soon we would have a 36-40 year period during which the long-term bonds would have out-performed S&P 500! The reason is not hard to see. A picture (please see Fig. 1) is worth a thousand words.

Yields since 1995

As can be seen in the figure, the long-term bond yield has been significantly above the inflation rate, i.e., a very good protector of purchasing power, and except for a very brief period during the 2008 crisis handsomely superior to the yield on S&P 500.

You would never see this picture shown on Bloomberg, or CNBC, or by any economist, off and on Wall Street. This would be the best indictment against investing in stocks. Bloomberg and CNBC have been scaring the public not to invest in Treasury bonds because they claim that there is a bubble in US Treasuries and no bubble in stocks. It also makes liars out of economists who failed to foresee the crisis of 2008 and the following depressed growth forecast by falling Treasury yields and economic manipulators advising the Donald and Hillary who promise 3.5% and 3% annual growth rates for the real GDP. What these two known dishonest candidates are likely to deliver is negative growth for the next 4 years and a huge deficit spending. Their economic advisors are nothing more than propagandists that surround powerful politicians in economic policy making positions. The Donald would be lucky if he escapes –3.5% annual growth rate within a year or two of taking office.

Falling Yields Rooted In Very Weak Economic Prospects

The 10-Year and 30-Year Treasury yields are highly correlated with the future nominal GDP growth rate. Fig. 2 tells the story of falling nominal GDP growth rate that mirrors the falling yields.

Nominal US GDP Annual Growth Rate since 1965

No amount of intervention by central planners can change the long-term course of the economy except for pushing the necessary adjustments into the future at a very high cost and inevitably leading to crises. The weak prospects for the future of the economy have everything to do with incessant intervention via deficit spending (fiscal stimulus) and monetary policy via artificially low rates. The current artificially low Fed Funds rate and very high debt/GDP guarantees much weaker economy in the future than the past 15 years that have seen the weakest economic growth in US history over a 15-year period, below 2%.

Putting Money Where Mouth Is

In 1998 I concluded that the stock market has been turned into a scam and a vehicle for massive financial fraud and it is the primary reason for inequality that has grown since. I concluded that the asset bubbles driven economy would have no choice but to end in a deflationary depression. It is obvious that with that view the long-term US Treasuries would be a great investment. Since then long-term US Treasuries have out-performed S&P 500, as mentioned earlier. But, the best is yet to come because the yields in the US would go negative for maturities below 5 years. The 10-Year yield would be below 0.5% and 30-Year yield close to 1%.

With that view I have put my money where my mouth is. Currently, majority of my family's net worth is in US Treasury STRIPS with maturities shown in Table 1. There have been some volatile periods following the crisis of 2008 that have created some good trading opportunities. The largest number of purchases were made towards the end of 2013, the best buying opportunity in the last 4 years, with average gain of 40%, and some in early 2011, the best buying opportunity in 8 years.

Table 1
Maturities, Price, and Gain to Date In my Family Accounts
DATE 09/16/16   12/31/15   12/31/13
2025 Feb 15 87.52 0.0%   81.35 7.6%   69.05 26.7%
2036 Feb 15 66.66 0.0%   58.03 14.9%   41.75 59.7%
2039 Aug 15 57.79 0.0%   49.78 16.1%   35.44 63.1%
2024 Nov 15 87.37 0.0%   80.97 7.9%   69.49 25.7%
2025 Feb 15 86.68 0.0%   80.32 7.9%   68.55 26.5%
2025 Nov 15 85.01 0.0%   78.47 8.3%   65.92 29.0%
2026 Feb 15 84.21 0.0%   77.83 8.2%   65.05 29.5%
2029 Feb 15 78.03 0.0%   70.23 11.1%   56.16 39.0%
2036 Nov 15 61.80 0.0%   53.45 15.6%   39.59 56.1%
2041 Nov 15 52.50 0.0%   44.74 17.4%   31.53 66.5%
2044 Nov 15 48.43 0.0%   40.22 20.4%      
  07/25/12   02/10/11   08/31/10
2025 Feb 15 79.29 10.4%   52.84 65.6%   62.88 39.2%
2036 Feb 15 56.29 18.4%   29.04 129.5%   39.52 68.7%
2039 Aug 15 50.46 14.5%            
2024 Nov 15 79.32 10.2%   53.75 62.5%   63.05 38.6%
2025 Feb 15 78.60 10.3%   52.88 63.9%   62.39 38.9%
2025 Nov 15                
2026 Feb 15                
2029 Feb 15 68.55 13.8%   41.42 88.4%   52.13 49.7%
2036 Nov 15 53.70 15.1%   27.03 128.7%   37.07 66.7%
2041 Nov 15 46.21 13.6%         29.82 76.0%
2044 Nov 15 42.86 13.0%            

The sad fact is that most people don't know how to invest in Treasuries, or how best to invest in Treasuries. While a topless dancer in my neighborhood bar in 1990s knew how to buy stocks and she and her friends loved CSCO! I was wearing a Cisco (my employer at the time) T-shirt and she told me that she owns their stock. Propaganda on Bloomberg and CNBC works: buy stocks and don't buy bonds. Few months ago on CNBC Warren Buffett said that he has all his employees' pension funds (many of the companies that he acquired) in stocks and nothing in bonds. He said laughingly that it was a no-brainer! Thank you, Warren, for keeping the Treasury prices lower than they would have been and giving little people like me better opportunity to buy. I am confident that Buffett's reputation as great investor would be ruined when US Treasury bonds out-perform BRK and S&P 500 by a factor of at least 5 over the next 3-5 years. The Bull market in long-term Treasuries has a ways to go. The stock market is primed for a serious decline.



Author: Jas Jain

Jas Jain, Ph.D.
the Prophet of Doom and Gloom

Copyright © 2004-2017 Jas Jain

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com