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Wandering In The Treasury Desert

Blog May 23, 2012

One of the biggest risks with The Treasury, many experts say, is for investors holding Treasuries and the potential for a long rise in interest rates, which would wither prices of current bonds and result in losses. Another risk these days is inflation, which like rust, seems to never sleep.

The worry for many investors is that the three-decade-long decline in interest rates, with its corresponding rise in bond prices, is close to the end. The rally began in 1981, after then-Federal Reserve Chairman Paul Volcker moved up interest rates to head off inflation. Back then the 10-year Treasury yield remained at almost 16%. With a few exceptions it has followed a general downward course ever since.

Tad Rivelle, chief investment officer for fixed income at Los Angeles-based TCW Group Inc., who oversees more than $30 billion in client assets, is doubtful the Treasury rally will last much longer. “If it is not over, it is far closer to the end than the beginning,” he said.

But many money managers aren’t thinking about Treasuries’ low yields or long-term performance. They are rushing in because Treasuries are a safe place to stash cash in the short term.

“For someone concerned about exposure to capital losses, the yield on the 10-year Treasury is sort of a minor consideration,” said Gregory Whiteley, portfolio manager of government securities at DoubleLine Capital, a Los Angeles, Calif., asset manager with about $34 billion in assets under management.

This short term mentality reminds us of Europe’s negative-yield bonds where people plunk down money with the knowledge that most of it will be remain but that some of it will definitely be gone. It seems to some that the mentality has changed from making the most on returns, to minimizing the loss.

Yet, even with the renewed specter of European problems, money is again moving into what looks like safe U.S. government debt. Investors in U.S. Treasuries are in an excellent position to loose money through inflation over time and yet they can’t seem to get enough of the flimsy paper, sending Treasury prices higher and yields lower.

Inflation on the dollar is like a thirsty person in the desert with 100 glasses of water. The hot sun is evaporating the water at an unrelenting rate. You still have 100 glasses of water but each glass will not go as far in quenching your thirst because there is increasingly less water in each glass as time passes. To make matters worse the table the glasses sit on is a bit shaky and there are those pesky gusts of wind that blow whenever there is a crisis here or around the globe. Such id the problem with the Treasury.

Sources & References In This Article

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