Strategic Fixed Income Investing: An Insider's Perspective on Bond Markets, Analysis, and Portfolio Management

CHAPTER 10

The Yield Curve

You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets.

—Peter Lynch

The fixed income market has been on fire for a number of years. I leave it open for interpretation if you as an investor view that as a positive or a negative. In truth, it would depend on the time frame. It is easy to single out a particular year or set of years in which the market has rallied. On the other hand, there are multiple snapshots in time when, if you had entered into a long position and not held the position to maturity, the trade would have been a losing endeavor. Realizing that there is daily, monthly, and even yearly volatility, take a step back and look at the big picture over a longer time frame. The Treasury market specifically has shown a great run over the past few decades.

There's no denying that the Treasury sector is the recipient of the flight-to-quality trade, regardless of the driving force. Over the years, there has been chatter about other government debt markets potentially taking the safe haven role, replacing the U.S. Treasury market. To date, and looking into the foreseeable future, this doesn't seem to be in the cards. It can't go without notice that over time there are moves higher and lower in price reacting to the current headlines, which at that point in time, are the be-all and end-all. However the market is sliced and diced, over the long term, ...