Charles’ Note: It was a moment of insanity. On March 9, 2020 yields on 30-year U.S. Treasurys dropped to 1.2%. As pandemic lockdowns took hold, investors became willing to tie their cash up for 30 years with a return not meaningfully above zero.
The joke on Wall Street was that the “risk-free return” had become a return-free risk.
They were right.
While Uncle Sam hasn’t defaulted (or at least not yet), investors buying bonds at those prices got crushed once yields started shooting higher in 2022.
Using the iShares 20+ Year Treasury Bond ETF (TLT) as a proxy, any buying in the summer of 2020 was sitting on losses of about 51% by October 2023. They haven’t improved much since.
So, after losing more than half their value, are long-term bonds interesting again? Or are they still just a dumb investment?
Well, Bill Bonner of Bonner Private Research has a little something to say about the “dumbest investment in the world.”
And you should listen up. Bill has been successfully trading on the market’s insanity for longer than I’ve been alive. And what he sees today crosses the line into madness.
Take it from here, Bill!
The Dumbest Investment in the World
Bill Bonner, Bonner Private Research
One thing I like about Argentina. They cook with salt. That’s it.
—Robert Duvall
Well, you never know, do you?
Recall that the Argentines introduced a “century bond’ in 2017. At the time, we were not alone in considering it the “dumbest investment in the world.”
Who would lend the Argentines money for 100 years, we wondered?
Statistically, the odds were that Argentina would default seven times before the bond matured.
Then, when the government defaulted just three years later, and the century bond was down 75%, we all laughed with a self-satisfied chuckle. We were right!
Well guess what?
The Wall Street Journal:
Investors who stuck with the country are having the last laugh. The bonds they were given in the default, plus the fat coupons on the original century bond, are now worth more than the original investment. Not just that: They are worth far more than if the dollars had been invested in “safe” U.S. Treasurys.
So far, U.S. 30-year Treasurys have lost about 10% of their value over the period. The Argentine bond has lost value too – about 25%. But the yield was so high (intended to compensate investors for the risk of default) that the overall gain is above 50%.
So ha ha to us!
And to the entire community of smart-ass investment analysts who were so sure the Argentine bond was a loser.
We all should have been more “cynicalist.”
That is not to say that we should have accepted the promises of flakey, unreliable governments. Argentina was a serial defaulter. No one could doubt that it wouldn’t default again.
Instead, our cynicalism should have been directed at ourselves. We should have realized that analysts – seeing a risk so obvious and unavoidable – would over rate it.
Investors set investment yields, not governments or analysts. Investors – taken as a whole… and over a long period – are not morons.
Bond investors, especially, are not idiots. If they were to buy the Argentine debt, they would need a genuine hope of making a profit on it.
As it turned out — they had it. The WSJ:
Josefin Meyer and Christoph Trebesch of the Kiel Institute for the World Economy and Carmen Reinhart of Harvard showed a few years ago that since 1816 the bonds of almost every risky country had long-run returns higher than the U.S. or U.K., despite frequent defaults. Just as with stocks or junk bonds, there is reward for risk, and the average return works out better than for the safest assets, U.S. Treasurys.
Say what?
Yes, it turns out that the rickiest sovereign credits (government debt) are also the most rewarding.
The safest – namely, U.S. Treasury bonds – are therefore less rewarding. How much less rewarding they are likely to be is, vaguely, today’s subject.
What makes $&!#hole credits so profitable is not the fact that they are sponsored by $&!#hole countries. It’s that they are recognized as unsafe… and often considered even riskier than they actually are. Investors demand protection… high yields, just in case something goes wrong, which it surely will.
What makes top ranked, super-safe credits un-rewarding, on the other hand, is that they are perceived to be so secure that investors see no reason to protect themselves at all.
U.S. Treasurys are thought to be the safest credits in the world. Why? Because the U.S. has the strongest economy… the longest-lasting democratic government… a court system that generally works… a military that can’t be beat… and a printing press that allows it to “print up” more money at will.
What it has not… and cannot give to investors… is a guarantee that its money will be as valuable when its notes and bonds mature as it was when they were issued. That risk proved to be decisive over the last eight years.
So now, when we look around the world for the “dumbest investment” now, our eyes are drawn not to those $&!#hole countries with high yields and low ratings, but to that bastion of safety and prudence, the U.S… with yields so low that any surprise on the downside could be devastating.
An investor buying a 30-year U.S. Treasury today can expect to earn a 4.6% yield. And yet, at the current rate of increase, assuming no major increase in the rate of added debt, he can also expect that the U.S. will have a national debt of more than $100 trillion when his bond matures.
The two things seem incompatible.
A country with $100 trillion debt hardly seems like a good credit risk.
And since it can “print” money at will, the danger is that the money it prints to keep up with its huge debt will be considerably less valuable in 2055 than it is in 2025.
Already, it’s hard to imagine the circumstances in which the U.S. could fully honor its current financial commitments. Adding another $60 trillion would not improve the situation.
What will happen?
Perhaps Team Trump’s Mar-a-Lago Accord will replace U.S. Treasury obligations with some sort of perpetual debt – that never needs to be refinanced.
Or, perhaps today’s 30-year Treasurys will expire worthless.
Or… who knows… like Argentina, some Milei-style miracle could put things back on a sound footing.
We don’t know, but our guess is that there is a gap between the real risks of U.S. Treasury debt and the perceived risks.
Which is another way of saying, the real value of Treasurys could be much less than the face value.
A further guess is that Treasury investors will eventually write off the difference.
Regards,
Bill Bonner