Tuesday, May 29, 2012

A Bond Curiousity

Here's a curious observation: 20-year U.S. Treasury bonds (TLT) are more volatile than corporate junk bonds (JNK). 

The options markets are pricing in a 68.2% chance that Treasuries will end with a gain or loss of up to 5.1% a month from now. The corresponding change for junk bonds is 4%. 

Since the conventional wisdom has it that junk bonds are dangerous for the unwary investors and Treasuries are havens of safety in an uncertain world, this is truly a counter-intuitive divergence.

Plus, Treasuries are yielding 3.03% a year in dividends, while junk bonds are yielding 7.45%. So the risk premium is also out of kilter.

No comments:

Post a Comment