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Why Only Treasuries?


I have never seen, relative to an economic backdrop like we have now, so little value in corporates, agencies, mortgages, etc.


I have received many inquiries on this topic. Let's discuss why I am looking heavy into 2's, not 10's, and avoiding corporates altogether and now mortgages as well.

Obviously, a two year Treasury has less duration (see Bond Basics) than a two note and has less volatility for a given change in rates. My firm is negative on the economy and expect the Fed to ease. So why not 10's? Because of the current shape of the curve. We already own some 2's from 5.25% and took some profits in 10's as mentioned here previously.

Let's say 2's go to 3.5%. I think the curve will be in a 'curve steepener.' In other words, rates on 2's will fall faster than the rest of the curve, taking the curve from flat to a more normal, steeper curve, prior to the end of the Fed's ending their easing campaign. So we buy TWICE AS MANY 2's as we would 10's and think we can actually make more money with the same or less amount of risk. In addition, we always like to ask ourselves, "what if we are wrong and rates rise?" Obviously, 2's will crush 10's in performance and we have our 2's to sell to extend into more duration.

Why only Treasuries? Well. Put it this way. I have been in the business 26 years or so. I have never seen, relative to an economic backdrop like we have now, so little value in corporates, agencies, mortgages, etc. I think spreads will eventually widen, perhaps DRAMATICALLY, which is normal in slowdowns. Here is a chart courtesy of Ned Davis Research, showing the measly spreads available today.

Positions in various front end Treasuries

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