Even More Innumeracy from Jeremy Siegel

When Wharton Professor Jeremy Siegel takes on math, it’s usually not pretty. I’ve caught him making basic math errors a few times before.

He’s still doing it.

In the Bloomberg article I linked to before, Siegel has a long quote:

“The rally in bonds is a once in a millennium event, but it’s absolutely mathematically impossible for bonds to get any kind of returns like this going forward whereas stock returns can repeat themselves, and are likely to outperform,” he said. “If you missed the rally in bonds, well, then that’s it.”

He may be right about the direction of bonds, but he’s simply and obviously incorrect about the mathematical impossibility of bonds outperforming.

Just because yields are low doesn’t mean they can’t go lower.

Let’s take a 30-year bond with a coupon of 10%. If the bond sees its price jump by 50%, that brings the yield down to 6.28%.

But if we take a 30-year bond with a coupon of 5% and if its price soars by 50%, that brings the yield down to 2.59%.

In other words, as yields go lower each basis point is worth a greater price.

Yes, bond yields are low, but there’s absolutely no rule in the realm of mathematics that prevents bonds from seeing the sames kinds of returns they’ve experienced.

Posted by on October 31st, 2011 at 11:43 am


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