Treasuries Gone Wild
Some of you may remember Crazy Eddie, the retail chain whose TV pitchman crowed that its prices were so low they were insaaaaaane. That’s a perfect word to describe the Treasury-bond market today. The interest fails to cover today’s negligible inflation rate. Yet buyers—mostly institutions searching for a lockbox rather than income—pile in and drive yields down with each passing day. Early in June, the yield on the ten-year Treasury sank to 1.47%, a number so low that it appeared to be an optical illusion.
Because bond prices and interest rates move in opposite directions, the plunge in yields is a windfall for Treasury holders. But if you’ve been following my comments for the past couple of years, you’re not counting these gains, because I have adamantly opposed owning government debt that pays such puny yields. And I’m sticking to my guns. This is not the time to buy Treasuries—not directly and especially not through a fund. The income is scant, the opportunity is small, and the risks are great.
What to Own
Once yields reverse course, Treasuries will begin to inflict pain on their holders. Kiplinger’s, which previously had forecast that the yield on the ten-year bond would hit 2.5% by year-end, has now pushed that forecast out to 2013. Should this prove accurate, you’ll find better opportunities in high-dividend stocks and other income-plus-growth investments. (For specific ideas, download the premier issue Kiplinger's Investing for Income for free..)
I don’t think my alarms about rising Treasury yields have been wrong, just premature. In this, I’ve had plenty of good company. For example, the ten-year yielded 2.3% on April 3, when one of the clearest-speaking government bond guys I consult, New York City money manager Richard Saperstein, warned that bonds could begin suffering heavy losses any day. I quoted Richard on this, which is tantamount to saying I found him to be persuasive. I still do.
Or consider what happened in August 2011, when the ten-year yielded 2.6% and Standard & Poor’s busted the Treasury’s credit rating from triple-A to double-A-plus, an event that in normal times would send America’s cost of borrowing into orbit. I wrote that you should reinvest your money elsewhere if you owned Treasuries that were maturing. And to throw yet another pie in my own face, the yield was 3.7% in early 2010, when I wrote a column, called “What Ails Treasuries,” that suggested to readers that they instead buy junk bonds, investment-grade corporates and municipal debt. Fortunately, all of those sectors have done well, but not as well as Treasuries have.
I relive these misjudgments not just to come clean. The moves in Treasuries raise a serious question: Is the Treasury market forecasting such a bleak economic future that we should be terrified of all risky investments and, therefore, bail out of stocks and bonds except those backed by Uncle Sam? Signs of weakness in the economies of highflying emerging nations, such as Brazil and India, fuel these concerns. Worries are growing, too, about China. If little Greece can cause so much trouble, what awaits our portfolios if China slumps?
During the credit crisis four years ago, Treasury bonds were the sole financial asset to rally. Everything else, obviously risky or not, got hammered. But as I spoke with a bunch of bond-fund managers and analysts over the past few weeks, not one argued that we’re facing a return to an environment in which nothing works but Treasuries. The current Treasury-buying spree reflects an elevated degree of fear, but that fear hasn’t yet translated into trouble for the triple-B corporates and municipals and other first-class bonds I’ve suggested are better bets than Treasuries. That’s why this isn’t a repeat of the nightmare of 2008—and why I don’t think Treasury yields will fall much more.
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