Don’t Be Fooled. Treasuries Aren’t Cheap Yet Simon White Treasuries might look cheap against stocks, GDP and the global cycle, but on their own historical terms they have more to fall before they become oversold and ready for a durable bounce. The counter-rally in Treasuries has yet to come, with 10-year yields as high as 5.34% so far failing to get buyers’ salivary glands going.
Treasuries are starting to look good value from several perspectives, yet holding off might turn out to be a wise move because an Occam’s razor approach shows they could fall even more before becoming oversold. The 10-year yield is over 60 bps higher than its fair value, implied by global central bank rate hikes, the yield curve, oil and the policy rate. Treasuries are also cheap relative to stocks, with the equity risk premium negative and as low as it’s been for over 20 years.
Adjusting yields for term premium gives a fairer comparison—on this basis USTs are not quite as cheap, but still attractive. On a price basis, the stock-bond ratio has declined slightly as Treasuries have sold off but remains approximately one standard-deviation rich. US yields have risen at about the same pace as the global developed-market average in recent months.
Nevertheless, buyer beware: there are reasons yields can keep rising. The annual return of the Treasury index is back to its trending mean, and in three-quarters of prior occasions when the annual return fell over six months and returned to mean, it was lower three months later—based on over 50 years of data. That suggests Treasuries are not yet oversold but likely will be if history is a guide.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing