{"id":31392,"date":"2012-08-06T10:20:26","date_gmt":"2012-08-06T10:20:26","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/08\/how-to-prepare-for-the-treasury-bond-apocalypse\/"},"modified":"2012-08-06T22:11:30","modified_gmt":"2012-08-06T22:11:30","slug":"how-to-prepare-for-the-treasury-bond-apocalypse","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/08\/06\/how-to-prepare-for-the-treasury-bond-apocalypse\/","title":{"rendered":"How to Prepare for the Treasury Bond Apocalypse"},"content":{"rendered":"

Article by Investment U<\/a> <\/p>\n

The Wall Street Journal<\/em> made an interesting observation recently, \u201cTreasury bonds are priced for the end of the world.\u201d<\/p>\n

It was a news article, not an opinion piece. But it happens to be the viewpoint of virtually every investor with half a brain \u2013 or a modicum of common sense. A few months ago, for instance, the world\u2019s best-known investor, Warren Buffett, wrote in his annual letter to shareholders, \u201cRight now bonds should come with a warning label.\u201d<\/p>\n

Yet I routinely talk to investors who still don\u2019t get it<\/em>. Treasuries are safe they tell me. And the historical returns are quite good, especially compared to the pittance money markets are paying.<\/p>\n

Both of these statements are true. But it still makes little sense to plunk for 10-year bonds that pay 1.5% or 30-year bonds yielding 2.5%. And if you\u2019re holding an investment-grade bond fund whose yield is much higher than this, you really need to hit the exit in a hurry. Here\u2019s why\u2026<\/p>\n

The World is Not Ending<\/strong><\/h2>\n

Let\u2019s start with the fact that Treasury yields are at all-time record lows. Why is this? Inflation is modest. Uncertainty is high. The U.S. may sink back into a recession. The wheels may come off the euro. Uncle Sam seems like a safe bet.<\/p>\n

And from a credit standpoint, U.S. Treasuries \u2013 even without their vaunted AAA rating \u2013 are indeed among the world\u2019s safest securities. Sure, a few blue-chip companies have higher credit ratings. But that could change. Plus, they aren\u2019t able to crank up the printing presses to repay their corporate debt. And some other countries have been fiscally responsible enough to maintain their AAA-ratings. But most don\u2019t have the economic strength, political stability, or military might to attract large capital flows.<\/p>\n

Lend the U.S. government money and, yes, it will certainly pay you back. But two dangers loom: inflation \u2013 the great bugaboo of bond investors everywhere \u2013 and, ahem, the world\u2019s not<\/span> ending.<\/p>\n

Let\u2019s take inflation first. Consumer prices are fairly low, unless you\u2019re looking at healthcare costs (or health insurance premiums) or putting a kid through college. The CPI was 1.66% for June, down from 3.56% a year ago. That trend could easily reverse, however.<\/p>\n

Oil, for instance, tumbled more 20% in the first half of the year. But it has moved back up almost as quickly lately. If inflation ticks higher, bond prices will sink lower. Even a half-point rise in inflation could cause 10-year Treasuries to fall 5%. And that might be just the beginning. If you don\u2019t know what happened to bond prices in the early 80s, you owe it to yourself to learn what happens to fixed-income investors when inflation and interest rates suddenly move higher. It\u2019s not pretty\u2026<\/p>\n

\u201cIf It\u2019s in the Papers, It\u2019s in the Price\u201d<\/strong><\/h2>\n

Then there\u2019s that matter of the world not coming to an end. I hear investors recite a litany of woes that beset the global economy today. But every one of these things \u2013 anemic GDP growth, currency problems in Europe, the already leveraged consumer, and so on \u2013 are already priced into stocks. As the old Wall Street saw reminds us, \u201cIf it\u2019s in the papers, it\u2019s in the price.\u201d<\/p>\n

As for those bond funds that, despite their high expenses, sport hefty yields, look out below. Many of them are highly leveraged \u2013 the bond equivalent of buying stocks on margin \u2013 and when bonds head south their shareholders will get routed.<\/p>\n

It hasn\u2019t happened yet. But it almost certainly will. In the meantime, with inflation at 1.6% and 10-year yields at 1.5%, bond investors are already earning a real negative return on their money.<\/p>\n

What\u2019s the point of owning an investment with very little upside potential and huge downside risk? Govern your portfolio accordingly.<\/p>\n

Good Investing,<\/p>\n

Alex<\/strong><\/p>\n

\n<\/a> <\/a> <\/a> <\/a> <\/a>\n<\/div>\n

<\/p>\n

Article by Investment U<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"

Article by Investment U The Wall Street Journal made an interesting observation recently, \u201cTreasury bonds are priced for the end of the world.\u201d It was a news article, not an opinion piece. But it happens to be the viewpoint of virtually every investor with half a brain \u2013 or a modicum of common sense. A … <\/p>\n

Continue reading “How to Prepare for the Treasury Bond Apocalypse”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-31392","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/31392","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=31392"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/31392\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=31392"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=31392"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=31392"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}