Guest Post: A Question On Risk: Part One Of Three

Tyler Durden's picture

Submitted by JM

A Question on Risk: Part one of three

The common belief is that long bond holders are suckers that always lose money.  But there is no denying their raw total return generating power.

Question 1:  Total Return, various asset classes: How can the long bond outperform the other, more risky competitors here?


Source:  Distressed Debt Investing

Possible answers: 

  • Inflation risk is overpriced… that doesn’t really explain the BarCap Aggregate underperforming SPOO and treasuries.
  • Risk in general is underpriced, and the long bond is the best way to derisk.  This is actually somewhat bogus, because you are taking massive term risk in the long bond.
  • You actually get compensated for taking term risk, more than any other risk.  Perhaps returns on other risks like credit risk, liquidity risk are distorted/subsidized/suppressed.  This is because governments must honor their obligations in order to keep rolling their debt.
  • Perhaps it is because they are almost uniformly hated as a long term investment, so those long are of the buy and hold persuasion, taking unlevered exposures.  They also act as hedges that are a small portion of their total portfolio decisions. 
  • Other, better answers?