Vanguard 10-Yr U.S. Treasury Yield Interest Rate Forecast

By: Richard_Shaw

According to Vanguard projections (made 3/29/10 for, AAII Journal, June 2010, page 7) 10-yr Treasury rates are implied by the current yield curve to be 4.4%, 5.2% and 5.6% by 1 year, 3 years and 5 years into the future. The current rate (June 15) is 3.32%.

They don't do a great job of explaining just how they got to those projections, but given their huge bond asset base, we think they should be presumed to be well qualified to make the projections.

They certainly cover themselves well with a disclaimer. Basically, they say you've to make some projection, but the future often unfolds differently. Therefore, broad diversification among bonds is more likely to be satisfactory over time than a narrow focus, which can seem right now, but turn out quite wrong later. --- So their article and this discussion is probably better than doing nothing all, but, as with any forecast, shouldn't be taken as ultimate truth.

For perspective, they report that historical rates were 4.9% since, 1800, 4.7% since 1900, 7.3% since 1970, and 4.6% since 2000.

The price implication for 10-year Treasury rates, by our calculation, is for price declines of 9.6%, 16.5% and 19.9% by years 1, 3 and 5.

That calculation is based on multiplying the duration for the current 10-year Treasury (which is 8.67 years) by the percentage yield change (1.1 * 8.67, 1.9 * 8.67, and 2.3 * 8.67).

Considering the interest that will be received over the holding period (without reinvestment), the net of price change and interest proceeds would be implied to be losses of 6.3%, 6.6% and 3.4% over 1, 3 and 5 years.

Those expected interest rate changes are large versus short term history, as the 1-year chart shows..

However, this 10-year chart of the rates for the 10-year Treasury, shows Vanguard's projections to be very much in the range of rates that we experienced in the period from 2000-2007 (except for a dip below during the last major bottom in 2002-2003).

This 50-year view of rates for the 10-year Treasury, shows plenty of room for rate increases well beyond Vanguard's projections in times inflationary, stress as we had in the early 1980's.

Related ETF products: IEF and TLH.

Holdings Disclosure: As of June 16, 2010, we do not own any securities mentioned in this article in any managed accounts.

By Richard Shaw  http://www.qvmgroup.com

Richard Shaw leads the QVM team as President of QVM Group. Richard has extensive investment industry experience including serving on the board of directors of two large investment management companies, including Aberdeen Asset Management (listed London Stock Exchange) and as a charter investor and director of Lending Tree ( download short professional profile ). He provides portfolio design and management services to individual and corporate clients. He also edits the QVM investment blog. His writings are generally republished by SeekingAlpha and Reuters and are linked to sites such as Kiplinger and Yahoo Finance and other sites. He is a 1970 graduate of Dartmouth College.

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