You Can Still Count on U.S. Treasuries

You think America’s finances are bad now? They were a real mess following the Revolutionary War and the Treaty of Paris in 1783. The fledgling nation’s credit sank so low that by 1787, government bonds traded at less than 15 cents on the dollar.

The resulting chaos was a force in pushing leaders to gather at the Constitutional Convention of 1787. A nation with a federal Constitution emerged in 1789, and a year later Treasury Secretary Alexander Hamilton smartly established the central government’s finances with three bond issues: The “6s of 1790” for $30 million, the “Deferred 6s of 1790” for $14.6 million, and the “3s of 1790” for $19.7 million. Since then, the sovereign debt of the U.S. evolved into the bedrock, default-free security for savers. Flight to safety and U.S. Treasuries still are synonymous for investors at home and abroad.

The question is, looking forward, will Treasuries remain a safe haven for everyone from retirees aiming to preserve their savings to workers nervous about getting a pink slip? The doubts about Treasuries gnaw at investors following Washington’s summer debt-limit shenanigans. The federal government came closer to the edge of default than many investors thought possible.

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Concerns among ordinary savers were stoked further by the government losing its coveted triple-A rating from Standard & Poor’s and ample signs that political gridlock is business as usual in Washington. Little wonder the investment community and financial press have speculated about all kinds of alternatives as safe parking places for money, including gold, farmland, commodities, blue-chip corporate debt and emerging-markets sovereign debt.

Here’s a surprise: The message from the market is that nothing has changed. The government didn’t default. And even during the past few weeks of unsettling market volatility, nervous investors have raced to embrace the security of U.S. Treasuries. For example, the appetite for short-term Treasuries has driven yields on three-month T-bills to 0.00%, one-year T-bills to 0.09%, and two-year T-notes to 0.20%. (T-bills and the like are considered the equivalent of cash on Wall Street.) “The U.S. is still the safe haven,” says Campbell R. Harvey, professor at Duke University’s Fuqua School of Business. “People shouldn’t shun U.S. debt and the dollar.”

The same holds for other government-backed accounts and securities. More than 380 banks have failed since early 2008. Yet there have been no bank runs reminiscent of the 1930s, and the Federal Deposit Insurance Corp. has kept its insurance pledge to back customer holdings up to $250,000. It’s also true for federally insured credit unions. “The conventional safe stuff still is safe,” says Jonathan Guyton, a certified financial planner and principal of Cornerstone Wealth Advisors Inc., in Minneapolis. “The past three years have been a wonderful stress test, a real opportunity to test our assumptions about safe assets.”

In sharp contrast, many of the alternatives are too volatile. Take gold, a classic store of value for turbulent times. The precious metal has been on a remarkable run, more than doubling in price since the beginning of the Great Recession. Yet recently gold has been on a boom-and-bust roller coaster. For instance, the price surged by some 16% from August 5 to August 23, reaching a record $1,917.90 an ounce. Yet by August 25, it had plunged in value by more than 10%.

The volatility doesn’t mean many of the alternatives are bad investments. They may be reasonable speculations. No, the drawback is that the underlying values are too volatile, subject to the manic moods of the market. “It’s all about how well will you sleep at night,” says Joel Larsen, a certified financial planner at Navion Financial Advisors, in Davis, Cal.

You can’t escape the trade-off: Safety and risk are two sides of the same coin. The trick with investing is to decide what risks you’re willing to accept and which you are eager to shed. For example, U.S. T-bills, online savings accounts, credit union certificates of deposit and similar government-backed securities remain savvy parking places for money if you’ll need it within the next three years. The price of preserving principal is a zero return at best, and most likely a negative return after taking inflation into account. So what? The money will be available to you.

No question, hedging against inflation looms large for long-term savers. To give an extreme example, there isn’t any credit risk with a 30-year zero-coupon Treasury bond, yet its price will fall about 30% on a one-percentage-point hike in the inflation rate.

Look at it this way: We’re not living through anything we haven’t faced before. The searing experience of the past few years has simply reaffirmed traditional investing values, which is hardly surprising because the bedrock concepts were forged during previous catastrophic episodes.

Among those critical concepts is diversification. When it comes to your stash of safe money, accounts backed by the full faith and credit of the U.S. government are among the best in the world. Yet even here diversification is smart. Spread the wealth among T-bills, bank CDs, credit union savings accounts and the like. “’Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket,” said Miguel de Cervantes Saavedra in Don Quixote de la Mancha. Good advice for the 17th century. And the 21st century.