Asking the credit forum since trying to understand this. Explain this to me as you might a small child or a golden retriever, it wasn't my brains that got me here, I assure you of that.
30 year Treasuries are paying 3.98% https://fred.stlouisfed.org/series/DGS30
3 month Treasuries are paying 4.72% https://fred.stlouisfed.org/series/DTB3
I get it that some long term investors like insurance funds need to duration match so they have to buy the longer end, but why would an investor take on duration risk on the long end to get LESS return? Shouldn't it stand to reason that the long end should start rising also at some point? At what point does investor preference change, or is it more a function of the Fed pushing short term rates up more so than the long end reacts?
Comments (10)
Because the market believes rates will eventually decline and the 30 year factors that in. Also, if rates do decline that 3 month paper was nice but only temporarily. You'd then need to redeploy at a lower rate. Might as well lock in a good rate for longer term.
Long end rates are pinned down by an underlying assumption that 1) The Fed will be able to get inflation under control (<=2%) in the long run and 2) Will be able to do so with a long run Fed funds rate around 2.5% (term premiums, rightly or wrongly, are still negative at the long end of the curve).
Frankly, long end Treasury rates are propped up by balance sheet constraints and such - 30 year swaps are at a material negative spread to Treasuries and helps illustrate the faith that markets have in the Fed being being able to return to a target inflation environment with a more "normal" Fed funds rate. Whether or not these pan out is another question. Long-end rates would likely rise materially if markets lose faith in either of the above two.
Were you first, were you smarter, or did you cheat?
Glad someone got the reference lol
Lol cuz that stuck with me cuz I've figured my brains don't really match up with the best in the industry (the ones who started trading at 14 and want to work at a hedge fund at 16) so I need a different way
I'd like to think I was smarter, but it's a damn sight easier to just be first.
Also remember money plows into those safer 'defensive' assets when economy deteriorates and we enter into a recession. After J.Powell rhetoric market began to price in higher for longer with Fed #1 goal being to curb inflation even if that means unemployment and a recession, thus demand for 30s will rise if we do enter into a recession. At that point FI investors can look to sell some of those longer-dated treasuries at higher prices. This is just one factor anyways but you was on-point also with liability mismatching etc.
Obligatory SB for the margin call reference
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