Equities Offer Hideous Duration Risk At Record Highs

The highest quality bonds have sold off-year to date while risky assets have leaped. The opposite happened last February to March when risk assets last crashed. The negative correlation offered by treasury bonds is extremely valuable in managing portfolio risk.

As typical, equity-bulls are declaring a few percentage point decline in bond prices ‘carnage’ and warn that long bonds have ‘duration’ risk (time to get your money back through weighted cash flows) while failing to mention (or appreciate?) that the duration risk in equities is much larger than bonds. Equities have no set maturity date at all, no contractually required income payments, and can drop as much as 100% in a matter of hours and days.

With a dividend yield of 1.5%, the S&P 500 has a duration at least twice as long as a 30-year treasury and dropped 37% last year in just 3 weeks. Stocks that pay no dividends are even worse. Nonsense is the universal currency of many market commentators.

With most convinced inflation will run hot and treasury yields continue to climb (as their prices fall), we are watching closely for another valuable buying opportunity to add the highest credit-quality bonds. David Rosenberg explains more on why in the clip below.

David Rosenberg of Rosenberg Research predicts the 10-year Treasury Note yield will fall to 1%. Here is a direct video link.

Disclosure: None.

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