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February 09, 2006

Real Men Trade the Long Bond
by Bob Hoye

Thursday's auction will mark the resumption of issuance of longer-dated treasuries.

It is worth a general comment, particularly as the coupon is expected to be around 4 ½%. Low coupon bonds with long maturities are volatile, which some traders find daunting.

In 1779, Samuel Johnson observed: "Claret is the liquor for boys; port is for men; but he who aspires to be a hero must drink brandy."

These days, heroism is found in martinis and the long bond. Some twenty years ago, there was an article along the lines of "Real Men Trade Long Bonds". We would still go along with this and observe that the ten-year note, like Chardonnay, is for boys.

Most of the fashion in the shorter maturities has been due to Europe, which merits some review. Over the past 100 years, Europe's political and consequent financial instability made it a rare accomplishment to have a liquid money market, let alone a liquid market for long-dated issues. Perhaps when Europe abandons its dreadful and endless experiment in socialism (Moscow on the Maastrich), a big liquid market for long maturities will develop.

This could take a decade or so when eventually trading the shorter maturities will be relegated to those who have just reached the drinking age.

Of course, we all know that the bigger bang from the trading dollar is obtained from the lowest coupon with the longest maturity. In this regard, British Consols with a 3% coupon and perpetual term are ideal. We'll have to do some thinking about a perpetual "zero".

Canada used to have a 3% "Perp", but the "Federales" repudiated their obligations by forced redemption. With a bureaucracy dedicated to lowering interest rates, having a 3% issue outstanding when the long yield was at 19% (1981) was just too embarrassing.

Financial turmoil could soon increase corporate long rates, but after that the next bull market for long governments in the senior currency could take the yield down to 3%. In which case, the Consols or a 4 ½% long treasury would be a macho performer.

Bob Hoye
Institutional Advisors

The opinions in this report are solely those of the author. The information herein was obtained from various sources; however we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each securitys price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance.

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Moreover, from time to time, members of the Institutional Advisors team may be long or short positions discussed in our publications.

Copyright © 2003-2008 Bob Hoye

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