Jim Letourneau's Blog

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Playing Safe is Expensive

If you watched the recent Marc Faber interview posted, you'll recall his discussion of how risk-averse savers are being penalized by government policy.

Here is a specific example from Steadyhand  -  Safety is Expensive

Consider the facts. The yield on a 5-year Government of Canada bond is roughly 2.0%, while a 10-year bond is at 3.1%. Both are near historic lows. While they may not increase overnight, interest rates will likely rise over the medium-term once the economy gets back on track and inflation starts to re-emerge.

Our back-of-the-envelope calculations tell us that an increase in rates of 1% would lead to a decrease of roughly 4-5% in the market value of the 5-year bond, and 8-9% in the value of the 10-year bond. If rates were to increase by 2%, the 5-year issue would fall 9-10%, while the 10-year bond would drop about 15% in value.

More here

Of course getting crushed in the stock market is probably more expensive but the tide may be turning.