Thread by @A_kahar92

U.S Treasuries yields are close to zero, with shorter term maturities yields below longer term ones. The 40% allocation to bonds might be overrated to today's economic situation. As many U.S investors are exposed to treasuries rather than corporate bonds.

Short Thread 👇

1/8 As you can see on the chart below the 30Y maturity is at 159bps and shorter term maturities even lower. It is far better to hold equities in this case as equity premium are favouring equities.

2/8 As an example the dividend yield for Apple (AAPL) is at 74bps and the 10Y treasury is at 78bps, both yields are very close. The average inflation rate targeted by the fed is 2% and the U.S 30Y treasury is at 159bps, holding the treasury until maturity is loosing you money.

3/8 So you are losing money in real terms and the market is telling you that it is far better to buy stocks rather than U.S treasuries. Why would anyone buy U.S treasuries when it is yielding nearly 0% ? the answer is convexity.

4/8 Convexity is the rate of change of the duration to a change of 1% in interest rate. you might say what is duration, it is the rate of change in the bond price to changes in interest rates.

5/8 So when interest rates increases, the duration decreases which means that the price of bond is declining. This is called negative convexity. Inversely, when interest rates decreases, the duration decreases. This is called positive convexity.

6/8 So the only benefit of owning treasuries in the current economic landscape is to profit from bond positive convexity. Longer term maturities have a higher increase in percentage term than the shorter term ones.

7/8 Reducing bond allocation to treasuries to 25% 20% is appropriate, especially if the inflation scenario plays out.
I strongly believe that the U.S treasury risk free rate is overrated and mega cap stock should take the title of risk free rate.

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