“Why would market participants not take the risk free 5% in
treasuries vs the very risky 5% in equities?”
Maybe because treasuries are not truly risk free. When interest
rates rise, the principal or present value of longer dated
treasuries can lose more than 5%. You may counter that this risk is
small for short duration treasuries, but so is the total
return since they are not held for much time. One may counter that
a longer dated treasury can return a coupon for years and be risk
free if you are ready to hold to maturity, but equities still
return more over the long run if your holding period is that long.
As for treasuries producing cap gains as rates fall, there is no
guarantee that rates will fall soon or that the “flight to safety”
characteristic will return – given the 40 year bond bull market
seemingly has ended, we may be facing a decades-long bond bear.
Nothing is really risk free IMO.
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“Why would market participants not
Short squeeze is now underway
Posted by sethbru on 7th of Feb 2023 at 08:05 pm
“Why would market participants not take the risk free 5% in treasuries vs the very risky 5% in equities?”
Maybe because treasuries are not truly risk free. When interest rates rise, the principal or present value of longer dated treasuries can lose more than 5%. You may counter that this risk is small for short duration treasuries, but so is the total return since they are not held for much time. One may counter that a longer dated treasury can return a coupon for years and be risk free if you are ready to hold to maturity, but equities still return more over the long run if your holding period is that long. As for treasuries producing cap gains as rates fall, there is no guarantee that rates will fall soon or that the “flight to safety” characteristic will return – given the 40 year bond bull market seemingly has ended, we may be facing a decades-long bond bear. Nothing is really risk free IMO.