The US 10-year treasury yield stood on the 4% level which is at about the 2007-2008 level. Then, the US 10-year bonds seem to be good investments.
Opportunity
The opportunity of gain is obvious when the 10-year treasury yield maintains at or drops from the current level, since it either means locks in a 4% yield which mentally seems lucrative, or means gains in price increase.
Risks
But in this article, I am not worried about the earning potential. I worry more about the risks of investing in treasuries.
Analysis based on historical data
The first thing I'd want to do is to look at the historical returns of some treasury bond ETFs. I will be using IEF, iShares 7-10 Year Treasury Bond ETF.
2020/4 - 2023/8, the 10-year treasury yield increased from 0.65% to 4.04%.
IEF's return was -15.801% with a yield increase of about 4%.
2016/4 - 2018/7, the 10-year treasury yield rose from 1.47% to 3.06%.
IEF's return was -3.222% with a yield increase of about 1.5%.
2012/7 - 2013/10, the 10-year treasury yield rose from 1.64% to 3%.
IEF's return was -4.104% with a yield increase of about 1.4%.
2008/10 - 2009/10, the 10-year treasury yield rose from 2.24% to 3.83%.
IEF's return was 7.724% with a yield increase of about 1.6%. The bond got positive returns when the yield increased which is odd.
Compared with SPY during the above span
It could have been affected by the 2008 financial crisis but is still odd.
Using the bond's duration to get implied loss
After reviewing the historical data of a treasury bond ETF, I would like to look at the loss of a bond when the yield rises. The following result is based on the parameters such as coupon rate being 3.375% and coupon frequency every 6 months.
Yield rises 0.5% to 4.5%
The 10-year bond price drops 4.07815%
Yield rises 1% to 5%
The 10-year bond price drops 7.96328%
Yield rises 2% to 6%
The 10-year bond price drops 15.16321%
Yield rises 3% to 7%
The 10-year bond price drops 21.76217%
Conclusion
If we look at the real rate during the 2004-2006 rate hikes, the core PCE was at the 2% level while the Fed still raised the rate up to today's level of 5.25%, making the real rate to be about 3%. With today's core PCE at a 4% level, it is still possible that the Fed funds rate got raised another 2-3%, and if the 10-year yield increases by the same magnitude, we could lose up to 20% in the bond position.
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