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Treasuries: America’s Best Product?

Whatever you think about politics or politicians, in tough times investors will do well to bet on the government.

Every financial crisis has unique origins, but you can count on this constant: Investments funded or backed by the U.S. government have an intrinsic advantage. It’s irrelevant whether the Treasury borrows trillions or that the U.S. is caught with the rest of the world in a sharp recession. All nations can claim superiority at something, whether it’s art, electronics, engineering, fashion, gastronomy, music or soccer. Well, America unquestionably manufactures the world’s greatest government securities, denominated in the globe’s favorite currency. And tough times demand the very best.

The hunt for safe havens explains the high returns so far this year in Treasury notes and bonds. Through mid April, the T. Rowe Price U.S. Long-Term Treasury fund (symbol PRULX) showed a year-to-date return of 24.1%. Its intermediate-term sibling, PRTIX, gained 7.8%. The yield on the 30-year T-bond was recently 1.3%, a full percentage point less than on New Year’s Day. That means older 30-year Treasuries with coupons like 4%—the stuff you find in funds such as PRULX—change hands at 50% or 60% above their face value. (Yields, returns and other data are through April 17.)

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Chasing a madcap T-bond rally is not the only way to prosper beneath Uncle Sam’s umbrella. FDIC-insured bank deposits, a few of which still pay 1.5%, are just a start. Despite the economic contraction (or because of it), this is a fine time to pursue safety and income from proxy Treasury sources, such as government-guaranteed mortgages, real estate leased to federal and military tenants, stocks and bonds of defense contractors (whose revenues come almost entirely from the feds), and the dollar itself.

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One gem is WisdomTree Bloomberg US Dollar Bullish (USDU, $28), a direct way to benefit from the dollar’s enduring strength against foreign currencies. The fund pays a year-end cash distribution from Treasury debt it owns, as well as the proceeds from its activity in foreign-currency futures. The 2020 total return so far is 5.7%. Those who insist the dollar is “overvalued” and will “fall” or be “dumped” never say what is supposed to rise in its place. Yuan? Bitcoin? I don’t think so.

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For monthly interest income, Ginnie Mae funds excel. These own pools of home mortgages, such as Veterans Administration and Federal Housing Administration loans, whose principal and interest are guaranteed by Uncle Sam. The Bloomberg Barclays GNMA index is up 3.1% for the year to date. Offerings from leading fund firms include: Fidelity GNMA (FGMNX), T. Rowe Price GNMA (PRGMX), Pimco GNMA (PAGNX) and Vanguard GNMA (VFIIX). You’ll earn a yield of about 2.5%. Mortgage rates aren’t so low that there will be as much refinancing as the headlines imply, which bodes well for the principal.

Stealth guarantee. Consider corporate bonds effectively backed by federal payments. Northrop Grumman (NOC, $356), a defense contractor, gets 85% of its revenue from the Treasury. When it issued $2.25 billion of bonds in March—at the height of widespread liquidity and solvency panics—prices leaped 15% to 30% after issuance. Even so, the yields to maturity were recently solidly above 3%. Northrop is rated triple-B, but that’s a cut above other triple-B’s, because the taxpayers pay the bills.

Real estate investment trusts have been slammed by store closures, office vacancies, rent and mortgage deferrals, and desperate profit-taking. But Easterly Government Properties (DEA, $27), whose best tenants are the FBI, VA, FDA and Defense Department, is up 15.4% this year. It yields 3.8%. Whatever you think about politics or politicians, in tough times you’ll do well to bet on the government.

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