Bonds are really pricy right now, according to AQR Capital Management co-founder Cliff Asness.
"The bottom line is, as measured by real bond yield, U.S. Treasury bonds are really frickin’ expensive,” Asness contended. “Measured by the slope of the yield curve they are really frickin’ expensive. But, measured by the average of these two simple variables, they are 60+ year just about record-low frickin’ expensive.”
Asness discussed the “super-low” yields in his latest missive on the firm’s website Tuesday, with the caveat that the firm is not “suddenly pro-market timing.”
“When something as important as the U.S. bond yield hits historical extremes, it’s worth at least a discussion,” he wrote.
Asness and his team analyzed several measures of bond returns, including the real 10-year bond yield, the slope of the yield curve, and the 10-year bond yield minus the average of inflation and treasury bills, according to the blog post.
Each measure was low: The real 10-year bond yield and the slope of the yield curve both ranked in the fifth percentile compared to data from 1955 through 2019.
Then there’s the 10-year bond yield minus the average of inflation and treasury bills. According to Asness, this is essentially an average between the real 10-year bond yield and the slope of the yield curve.
This measure was at a 64-year low, according to AQR’s analysis. In Asness’s view, this is “pretty wild considering some of the times we’ve lived through.” He pointed to the period following the 2008 financial crisis, in which that average measure was not as low as it is today, thanks to a yield curve that was sloping upwards.
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According to Asness, the fact that the real 10-year bond yield and the slope of the yield curve are low at the same time is much worse than if one looked at the measures separately, especially because the two are not as correlated as one might think. The AQR co-founder noted that historical data shows the two measures to be quite uncorrelated, which means that when they are both low, “the average of them indeed tends to be a whopper (as it is).”
So what’s an investor to do? According to Asness, not much.
“Our recommendation is, again, you probably should do less than you first think,” he wrote.