"I feel that [long-term Treasuries] are going to be one of the worst areas of the market," said Bob Rowe, co-founder of Enhanced Investment Partners LLC of Chicago, which serves as a consultant to pension plans and investment advisers. "The long bond is way overvalued."
Kristin Hetzer, founder of Royal Palms Capital LLC in Rolling Hills Estates, Calif., which manages $50 million, is worried that inflation will diminish the value of 30-year Treasuries.
"I wouldn't put any money in long bonds," she said.
BOND ALTERNATIVES
In the meantime, though, advisers are finding it challenging to come up with other long-term fixed-income allocations.
Many are using short-term certificates of deposit with a slightly better yield than Treasury bills. Others are using money funds, shorter-term municipals or Treasury inflation-protected securities.
With fears that inflation will rise over the next few years, "you can make a good case for a two- to five-year TIPs ladder," said Stewart Taylor, a senior fixed-income trader at Eaton Vance Corp. of Boston. "If you go longer than five years, there's significant duration risk."
The immediate worry with Treasury bonds is supply. New government borrowings are expected to put pressure on prices.
Estimates of the debt needed to fund the federal deficit run from $1.5 trillion to $3.5 trillion.
Mr. Rowe thinks more than $3 trillion in Treasury securities might be floated. "If you keep supplying more bonds, and if you get ... shrinking demand, you're going to see interest rates go up," he added. "It's basic economics."
Furthermore, the increased supply is coming "just at the time when we're starting to face demographic pressures" on entitlement programs, said Lou Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, N.J.-based research firm that tracks government financing trends.
So far, demand for long-term Treasuries has been adequate to mop up supply.
But that could change when the debt markets and the economy stabilize and investors no longer see government credits as the only option, observers said.
The sudden increase in the personal savings rate has also spurred demand for Treasuries, Mr. Taylor said.
Until that unusual demand for Treasuries is over, "we're not going to know if supply has outstripped demand," Mr. Crandall said.
After the immediate supply concerns are over, most advisers worry that inflation pressures will return. Some even worry about hyperinflation and a worthless U.S. dollar.
The government is pursuing inflationary policies, Ms. Hetzer said, "but most [advisers] are skeptical that they'll be able to manage it" once inflation returns.
Prices on copper and oil are stabilizing, indicating improving demand and a "case for potential inflation," she said.
DEFLATION
But are the hordes of Treasury-leery advisers dismissing the odds of a significant deflationary period?
In such a scenario, high-quality credits such as Treasuries would be one of the better investment options.
"If we morph into a Japan-style deflation, the long Treasury at 3% is a great deal," said Mr. Taylor.
In a deflationary environment, the dollar strengthens, commodities and equities weaken, and bond yields move lower, he said, adding that a look at those indicators "tells you we're in a deflationary environment" now.
The Federal Reserve is clearly worried. In recent months, it has discussed setting inflation targets, and as part of that discussion, Fed officials have also talked about the importance of maintaining some expectation of inflation in order to avoid a deflationary trap.
That's because once the economy gets stuck in the "negative-feedback loop [of deflationary expectations]," Mr. Taylor said, "there's not much you can do" to get out of it.
If that point is reached, advisers might like to be stuck with those hated long-term Treasuries.
