Time to Develop an Exit Plan from Intermediate & L-T Treasuries
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View from the Observation Deck

  1. The yield on the benchmark 10-Year T-Note closed the trading session on 6/1/12 at 1.47%. That is a record low (previous record was 1.55% in November 1945).
  2. The 10-Year T-Note currently yields less than half of what its rate was on July 25, 2011 (3.00%). That was about two weeks before Standard & Poor's cut the U.S.'s credit rating to AA+.
  3. Treasuries have been a popular safe haven for many investors since the financial crisis began in 2008. It reflects a flight to quality, despite the credit downgrade.
  4. The uncertainty surrounding the ongoing sovereign debt crisis in the European Union and some recent softness in key economic indicators in the U.S. has boosted demand for Treasuries, in our opinion.
  5. In mid-2007, just prior to the start of the subprime mortgage meltdown, the 10-Year T-Note yielded as much as 5.30%. From 5/31/92-5/31/12, its average yield was 5.06%, according to Bloomberg.
  6. Investing in the 10-Year T-Note at today's historically low yield would result in a 19.0% paper loss if yields were to return to 5.00% by 2014, according to Businessweek.com.
  7. On top of the potential downside interest rate risk, investors need to be aware of just how fast rates can rise (see chart). It took only 26 trading days in 2003 for rates to jump 100 bps.
  8. The next rise in rates could be even faster, in our opinion. Why? The Fed boosted its balance sheet by $2 trillion to $2.9 trillion since 2008 in an effort to stimulate the economy.
  9. We believe it behooves investors to prepare an exit strategy for the day rates turn higher, because the market may not offer much time if we experience a mass exodus.
Posted on Friday, June 1, 2012 @ 3:16 PM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.