Advertisement
Investing

Treasuries: The Brand to Trust

Turn to Uncle Sam for security through the rest of the year.

On April 5, the yield on the ten-year Treasury note closed at 4.01%. That was its first finish above 4% in 18 months. Given the huge amount of outstanding Treasury debt and the government’s monumental borrowing needs, many people wondered what took so long. Then they’d often ask how fast it would reach 5%. Do I hear 6%? 7%? The message: Stay away from long-term Treasuries. You’ll get clobbered.

Advertisement - Article continues below

Wrong. The ten-year bond closed at 3.16% on June 22. If you had bought one on April 5, you would have seen the value of your investment appreciate by 7.1%—bond prices move inversely with yields. (For more on the edgy Treasury market, see What Ails Treasuries.)

In today’s climate, the textbook investing move isn’t necessarily the correct one. Consider this: Treasury-bond prices have been rising at the same time gold has been soaring. And despite a moratorium on drilling in deep waters in the Gulf of Mexico, oil prices are as calm as a bay.

Treasuries are the latest paradox. They’ve gone from absurdly overvalued to much of the global community’s investment of choice. Last year’s talk of the dollar’s inevitable collapse and of Treasuries as fish wrap is over. (Note my argument for the investment at that time.) Now, Treasury bonds are seen as blocks of granite. “The last 45 to 60 days, there’s been a global reallocation of assets” in favor of U.S. securities, says Richard Saperstein, managing director of Treasury Partners, a New York City money-management firm that invests in—you guessed it—Treasury debt. “The U.S. dollar is reemerging as the preferred currency at the exclusion of everything else,” adds Saperstein, a 25-year veteran of the bond business.

Advertisement
Advertisement - Article continues below
Advertisement - Article continues below

In San Francisco, Chris Shayne, of BondDesk Group, a source of bond-market information, says the unsettling May 6 flash crash in stocks also favors Treasuries. Since the crash, which lasted all of 20 minutes, individuals have ratcheted up their orders for Treasuries and cut down on buying other kinds of bonds, Shayne says. Even Pimco bond-manager extraordinaire Bill Gross, who in 2008 called Treasuries the most overpriced financial asset on earth, is adding them to Pimco Total Return (PTTAX), the world’s largest mutual fund.

The resurgence of Treasuries partly reflects economic jitters. Slow hiring and tepid corporate spending threaten to dampen the economic recovery. Banks remain reluctant to lend. Interest rates normally drift or fall when credit demand is weak. So expect the yield on the ten-year Treasury to bob between 3% and 4% the rest of 2010, spending more time below 3.5% than closer to 4%.

Who’da thunk it? Given that the Treasury’s bond-making machinery is likely to be running full-time this year and for many years to come, my forecast may strike you as optimistic. During the second week of June, for example, the Treasury manufactured $206 billion of debt, from 13-week bills to 30-year bonds. And when you vastly increase the supply of anything, whether it’s corn, condos or government bonds, its price is supposed to drop.

Advertisement - Article continues below

You may therefore wonder how much longer the Treasury can keep finding takers at such low interest rates. But for now, bond brokers say demand is enormous. That’s what counts because long-term Treasury yields are set in the marketplace, not by the Federal Reserve Board. “We’ve generally become accustomed to regular issuance despite the government’s swelling debt load,” says Justin Hoogendoorn, head bond strategist for BMO Capital Markets in Chicago and a former Northern Trust portfolio manager. BMO is owned by a Canadian bank, and while Hoogendoorn also recommends Canadian bonds, “we don’t really have a lot of clients looking for foreign currency exposure,” he says. “They’re looking for U.S. investments.”

Advertisement
Advertisement - Article continues below

New York money manager Jonathan Satovsky, who handles private accounts, is convinced that foreigners have a lot more faith in U.S. securities than do Americans, who seem to be pessimistic about nearly everything financial. “People in other places perceive their own securities and economies to have weak checks and balances,” Satovsky says. Negativity in the U.S., he says, is most pervasive among those 65 and older. They fear losing savings to hyperinflation, although that has bedeviled savers and pensioners in other nations but not in America—at least not recently.

Advertisement - Article continues below

Clearly, intangibles and value judgments are major factors in Treasury trading. Developments in the past couple of years have, believe it or not, enhanced the Treasury’s reputation as a provider of a reliable, high-quality product. The Treasury’s brand name in government-guaranteed debt securities is what Mercedes is to cars, Harvard and Oxford are to universities, Coca-Cola is to beverages and Google is to search engines.

So in times of stress—and that fairly describes the current situation—a Treasury bond’s resale value is likely to be a little higher and its yield a bit lower than news headlines, Wall Street warnings and apocalyptic chatter in the blogosphere might suggest they should be. If you truly need high income, government bonds don’t provide it. To get 5%, look at pipeline partnerships, utility stocks, conservative real estate investment trusts and investment-grade corporate bonds. But for a secure parking place through the rest of this year, and into 2011, Treasuries will work just fine.

Advertisement

Most Popular

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)
tax deadline

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)

Between due dates for IRA or HSA contributions, paying estimated taxes and other deadlines, there's more to do by July 15 than just filing your federa…
July 10, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020
Know Why Your Credit Score Changes: 9 Money Moves to Consider
credit & debt

Know Why Your Credit Score Changes: 9 Money Moves to Consider

Your credit score is a key indicator of your financial well-being and of the risk you pose to lenders. How good is yours?
July 10, 2020

Recommended

3 Municipal Bond Funds for Rich, Tax-Friendly Yields
Investing for Income

3 Municipal Bond Funds for Rich, Tax-Friendly Yields

Municipal bond funds allow you to enjoy the benefits of tax-exempt income. By investing in CEFs, you can sweeten the pot even further.
July 13, 2020
2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 10, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020
13 Best Vanguard Funds for the Next Bull Market
mutual funds

13 Best Vanguard Funds for the Next Bull Market

Optimistic that the bounce since March is indeed the start of the next bull market? Here are the 13 best Vanguard funds to help you make the most of i…
July 7, 2020