When I ask the question “What if the US 10 year goes to 0?", most do not know the effect, the catalyst, or if 0 has ever happened before. The math is fairly simple to do in Excel or with an old-school calculator, but let’s use RQuantLib to do the pricing and then use LatticeExtra with some slight adjustment in SVG. RQuantLib spits out a total return of 17% if we go to 0 by the end of October, which seems like a decent amount until we look at on a chart.
Mildly impressive, but the move is almost undetectable on a log scale.
Throughout history, we have really only one good reference point in Japan whose 10 year went very briefly to 0.47%, but we need to remember that was in extended deflation in which stocks and real estate lost 90%. That 17% return if we go to 0 (actually much less since
0.47% 0.43% was the stopping point) is not all that helpful in this devastating environment.
Even more strange is that the move we experienced over the last 15 months is greater than the potential move from here to 0. On a six month change in yield chart, the 2% from April to 0% in October seems perfectly normal if we forget about the starting point.
Similarly, a 12 month rolling total return chart does not reveal anything odd.
However, starting point is critical. Instead of subtracting ending from starting yield, ending yield/starting yield is more appropriate at this critical level. Now we can see how unusual the move really is.
If you are buying bonds to protect/benefit from a disastrous, deflationary “end of the world”, please be aware that best case you make a fairly measly 17%. Just moving back to where we were Spring 2011 would mean a bigger loss than the absolute best case.
THIS IS NOT INVESTMENT ADVICE. ALL OF THE ABOVE IS SIMPLY FOR ILLUSTRATION.