Ten Year Zero v. Ten Year Treasury v. Ten Year CD

[A_Hamilton]

I'm looking at buying some ten year US government guaranteed instruments as a hedge against deflation.

 

I can get:

 

10 year zero: 2.82% (10 year duration)

 

10 year treasury: 2.69% (8.8 year duration)

 

10 year FDIC backed CD: 3.307% (CIT or GE; 8.6 year duration; fully saleable on the secondary market)

 

I'm shocked by the huge spread CD's trade to treasuries. I like the CD option but am afraid that this spread to treasury's won't close (or could rise) if deflation hits and I won't get the same price appreciation on the CD as I might on a treasury if 10 year treasury yield decline say 100 bps. Any thoughts here? Thank you.

 

AHamilton

[thepupil]

if duration is what you seek, any reason not to buy the same amount of duration in long bonds? instead of a X% in 10 yr's why not 0.3X% in 30 year zero's or long bonds? 

 

since this is likely to be a low return/money loser part of your portfolio (the base case calls for inflation above 0%), I would suggest packing more duration into a smaller % of the portfolio

 

 

[A_Hamilton]

if duration is what you seek, any reason not to buy the same amount of duration in long bonds? instead of a X% in 10 yr's why not 0.3X% in 30 year zero's or long bonds? 

 

since this is likely to be a low return/money loser part of your portfolio (the base case calls for inflation above 0%), I would suggest packing more duration into a smaller % of the portfolio

 

Perhaps smaller position sizing is the way to go w longer duration. I'm a chicken for the long bond duration trades! 10 year CD w/ a coupon 60 bps over treasuries is scary enough!