Today, let’s counterpoint: I’ll show you a chart that makes sense to me AND fills me with more dread than seeing Aunt Ernestine in a swim suit.
…a rather unflattering swim suit.
I found this chart at FRED, an acronym for Federal Reserve Economic Data. This website is chock-full of charts and graphs direct from the government and financial institutions. And, as a bonus, they’re usually easy to understand.
Here’s the chart I’d like to focus on today, class:
So, if you aren’t familiar with Treasury Inflation-Indexed Notes, don’t start nodding off on me! I’ll have to send Aunt Ernestine over to sit on your lap.
That woke you up.
Let’s explain what the $%!@ we’re looking at here.
As you can see on the header, this chart shows the yield-to-maturity on a 10-Year Treasury Inflation-Indexed Note.
What’s a “Treasury”?
Investments that are simply referred to as a Treasury in the U.S. are products of the U.S. Government. They’re sold at an auction. The amount of the note is fixed (you buy in $100 increments), but the interest rate is what they bid on. If nobody bids, the government will have to pay a high return to lure investors. IF lots of people bid, the government is able to sell the debt for a lower price. Initially, this debt was priced at 1-1/4%. That’s a nice win for the U.S. Government.
As an example, if you have great credit, you do this with credit cards. Instead of jumping on the first credit card offer, you examine the interest rate. If it’s higher than you want to pay, you keep searching. Essentially, you’re pitting “investors” (lenders) against each other for the pleasure of holding your debt.
What’s a Note?
A note is a ten year bond. Once the bond is issued (this one was issued in July of 2010), it’s paid off ten years later.
Do you have to wait ten years to sell your bond? No. You’re allowed to sell early, but you’ll do it on the open market.
The open market conditions produced this graph.
What Does the Graph Show?
This graph DOESN’T show you the price of the ten year bond. Instead, it cuts to the chase. If the bond is sold initially for $100 (called the Par Value), and an investor will give you $105 for it, he should already know that he’s only going to receive $100 when the maturity date comes. Therefore, it’s a simple computation: if you over or underpay, what is the true interest rate you’ll receive?
This chart shows the true rate if you purchased this 10 year note today.
In short: the price is so high you’re guaranteed to lose money.
Why is this Frightening?
If investors are comfortable loaning money to the government, knowing that they’ll lose money, this means that other places to invest money are even uglier.
In short, we can discern:
– There is much constenation about the financial markets now
– Lots of investors feel comfortable losing a little money with the U.S. government
From that I infer that investors think they’ll lose more elsewhere.
Is This An Opportunity?
Clearly, there is less opportunity in Treasury Inflation-Indexed Notes than there is with Aunt Ernestine. However, some investors may think that this means that the panic has gotten so high that there are obvious opportunities elsewhere.
Remember that the majority of traders have more money than you and I. Professional traders work from platforms that spend more money on research than we spend on our homes. If you’re looking for opportunity, it isn’t apparent in this particular graph. You’ll need to look further.
Where Do You Look Next?
This chart leads me to want to see past correlations between the 10 Year Treasury Inflation-Indexed Note market and other financial markets. By viewing these, I might be able to better discern if this is simply panic or something bigger.
More on that another day.
For today, know this:
– FRED is a good place to find charts and graphs
– Treasury note graphs can give you clues about the market overall
– You can lose money in government bonds if you buy them on the open market
Is there anything I missed here? Let’s chat about this market and investments in the comments, minions.