With stocks, all good investment stories begin in October. Bonds are no different. In October 1981, the federal government of the United States of America auctioned off thirty-year treasury bonds at a rate of 14.8%, the highest in its recorded history. At the time, the United States was steeped in annual inflation of 10.5%.
For those who anticipated the rise of a Paul Volcker figure, or at least had the sense that interest rates were more likely to decline over the coming decades than rise, and chose to purchase U.S. government debt, the results were some of the most impressive on a risk-adjusted basis.
If you invested $10,000 in U.S. Treasuries in October 1981, your family would have received payments of $740 every six months for thirty years and then received your initial $10,000 back as well.
This isn’t just an abstract thought experiment. In October 1981, the United States government did issue $800 in bonds paying 14.78% that it dutifully paid all the way through 2011. Some families and entities owned each dollar of that offering.
At what point should high-quality corporate bonds and U.S. government debt capture your attention? I would say any time the yield crosses 7.5%, subject to revision during times of war and economic calamity.
It is just..amazing….to think that there are people and institutions out there who have quietly collected over 14% each year on an initial investment in gilt-edged U.S. Treasuries. It provided a firehose of real cash that covers most of an adult’s investing lifetime, money that could be spent to support a lifestyle or generationally fund new investments elsewhere. Acting during that moment of pricing dislocation just once in your lifetime can deliver rewards that far exceed whatever you accumulate during the grind, day in and day out.