In paragraph 5 of the Bloomberg Business article Big Money Sells in Bond Market as Pimco Cuts Government Holdings, Wes Goodman wrote:
“An investor who bought today would lose about 2 percent on a pre-tax basis if the forecast is accurate”,
The article would have a far greater impact if potential loss incurred by the investor was correctly pointed out as being closer to 20% rather than 2%.
Buying a 10 year treasury today would yield 1.95% or $1.95 per $100.00 invested.
Should rates rise to 2.40%, then one would receive $2.40 per $100.00.
As there are only a few months until the forecast rise in rates is completed then as the bonds are almost exactly comparable, the price on the first bond purchased would fall to match the yield of the second bond i.e. 2.40 %.
As Interest rate = Coupon / price
then :
Price = Coupon / Interest rate.
As the interest rate moves from 1.95% to 2.4%, the coupon moves from $1.95 to $2.40Â
The equation becomes Price = $1.95 / 2.40% = $80.83
I believe that a potential 20% loss in 10 year US Treasuries would be a much greater incentive for Pimco to sell than a 2% loss.
The question really becomes: What would push long rates up so much over such a short period, given Jamie Diamond’s proclamation of a shortage of US Treasuries and the ECB’s action to drive down Euro rates through QE?
Furthermore, the rate differential between Europe and the U.S is what makes U.S. treasuries so attractive as they also come with a rising U.S.$ Â
Certainly the last thing the Fed will do is ramp the Funds rate up to create an inverse yield curve and drive the U.S. dollar even higher and the economy back into a recession any time soon.
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