“Bond Yields Are So Low, There’s No Profit”

I often hear investors whine that since bond yields are already so low, there’s almost no room to profit.

Actually, there’s lots of room. If a perpetuity (a bond yield that never matures) sees its yield drop in half, that means the price doubled. That’s even true if the yield drops from 1% to 0.5% or even 0.0001% to 0.00005%. It’s always a double.

My point isn’t to suggest that you should expect perpetuities to double. Earlier today, Kelly Evans of the WSJ tweeted that it wouldn’t surprise her to see the 30-year T-Bond below 3%.

Right now, the 30-year is yielding about 4.25%. A move from 4.25% down to 3% equals a rise in price by about 25%. Don’t let the math fool you. Big gains can still be made from low yields — assuming yields continue going lower.

Posted by Eddy Elfenbein on May 25th, 2011 at 1:20 pm

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