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Are U.S. Treasury Yields Getting Attractive?

Are U.S Treasury Yields Getting Attractive? 
Ron DeLegge, Editor
January 30, 2013

Heres a story the media is just catching on to: The yield on 10-year U.S. Treasuries (NYSEARCA:IEF) has been edging higher and is now close to matching the S&P 500s (NYSEARCA:IVV) dividend yield.

The 10-year U.S. Treasury bond currently yields 1.99% compared to the S&Ps 2.07%. Last year, the S&Ps dividend yield peaked at 2.29% in November.

As the S&P 500 and Dow Jones Industrial Average (NYSEARCA:DIA) approach all-time highs, U.S. Treasury prices have been pounded, pushing up yields. The price and yield of bonds is inverse correlated. As yields rise, bond prices fall and vice versa.

The DJIAs all-time high is 14,165, while the S&P 500s all-time high of 1,565. Both benchmarks reached those highs on Oct 9, 2007.

None of this is part of the Federal Reserves plan, because the Fed wants to keep a lid on borrowing rates. Bloomberg pointed out:

The Fed purchased $3.357 billion in Treasuries maturing from February 2020 to November 2022 as part of its plan to cap borrowing costs. The central bank is purchasing $85 billion of government and mortgage debt each month.

From a yield standpoint, U.S. Treasuries are still not attractive because theyre not even keeping pace with inflation. In 2012, the Consumer Price Index (CPI), a benchmark of inflation averaged 2.1%. After factoring in inflation plus taxes, the yield on U.S. Treasuries is negative.

What about credit default risk? Are Treasury bondholders being adequately compensated for this risk? Of do we still have the fairyland view that Treasuries are "risk-free" investments? 

If the yield on 10-year Treasuries matches or even exceeds the S&Ps dividend yield (NYSEARCA:SPY) by a few basis points, it will still not make Treasuries an attractive investment for generating income.

On the other hand, the view that Treasuries (NYSEARCA:TLT) are a protection against a future stock market (NYSEARCA:SCHB) correction is the right interpretation.

In 2012, our $100,000 all ETF Income Mix Portfolio  generated $10,400 by combining both dividend income and money from covered calls. The expense ratio average for this portfolio is 0.18%, which is five times less compared to U.S. stock mutual funds.

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CommentsAdd Comment

rob c said on February 01, 2013
  I think it is dumb to compare a Fed rigged 10 year bond to the s&p 500. If you want to pretend a stock is like a bond than a stock would be more comparable to a B grade junk bond fund. The vanguard high yield corporate fund payout is 6% far better than a puny 2% for a stock which is NOT backed by Any corporate assets during 2008 this fund lost 20% but was back to even by Nov 2009. The S&P lost 40% and took several years to get back to par. You can not beat a 6% return the fund owns several hundred bonds if a few default who cares the vast majority will pay
Kero said on January 30, 2013
  S&P 500 yield 60% lower today vs. '81 top, yet we're told how dividend payments are at all time highs. Something's wrong.
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