Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Everyone Hates Treasurys Now


One of the themes of the the CNBC and Institutional InvestorDelivering Alpha conference that I did not get a chance to write about yesterday was the universal hatred of Treasury bonds.

Speaker after speaker castigated U.S. government bonds. Greg Fleming, who runs Morgan Stanley's wealth management business, captured the spirit of many at the conference when he described Treasurys as not offering "risk-free returns" but "return-free risk."

Fleming went on to predict that yields on the 10-year will be between 3.5 percent to 4 percent five years from now. That would certainly be painful for anyone who buys in now, when Treasurys are yielding 1.51 percent.

But with everyone at the conference seeming to channel Nassim Taleb (who advised "every single human being on the planet" to short Treasurys back in 2010), it's important to recall that Wall Street has been dead wrong on Treasury yields for years.

Way back in 2009, The Wall Street Journal surveyed the 18 primary dealers, the banks that trade directly with the Federal Reserve and underwrite Treasury auctions. At the time, the 10-year was yielding 3.54 percent.

The median forecast for the 10-year note was a yield of 4.125 percent by the end of 2010. RBS and Morgan Stanley predicted that yields on the 10-year would rise above 5 percent. What happened was very different. By the end of 2010, it was headline news if yields creeped above 3 percent. Only Goldman Sachs and HSBC correctly forecast declining yields in 2010.

Some day, I suppose, the yields will rise. Someone who correctly predicts the arrival of that day will become fantastically rich and we will hail him as a genius.

But I suspect that there will be far more people wrong about yields before the genius is revealed.

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