| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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The Risks Lurking in Treasury Bonds |
Bloomberg - Sept. 13, 2011 - By Lewis Braham
How's this for an investment opportunity: a guaranteed yield of 3.2 percent, with an enormous potential downside. As risky as that sounds, millions of investors are moving money into Treasury bonds as a "safe haven." In early September, the yield on the 30-year Treasury bond sank to a new low of 3.2 percent, while the 10-year note fell to 1.9 percent. If the inflation rate stays anywhere close to its current modest 3.6 percent pace, long-term investors will be guaranteed to lose money after factoring in inflation's toll.
And that's only scratching the surface of the risks.
Many savvy money managers are steering clear of the Treasury minefield. "I wouldn't lend money to anybody for 30 years at 3.2 percent, especially not the U.S. government," says Carl Kaufman, manager of the Osterweis Strategic Income Fund, which has delivered a peer-beating 7.3 percent annualized return over the past five years. Instead, Kaufman is loading up on short-term high-yield bonds such as that of discount retailer Dollar General, which yields in excess of 5 percent with a two-year maturity.
The risk Kaufman and other managers are worried about is something most bond investors haven't had to deal with since the 1970s -- the prospect of a sustained rise in interest rates. When rates go up, bond prices fall as their yields are less attractive compared with new bonds issued at the higher rate. The longer the term, or maturity, of the bond, the greater the interest rate risk, because investors are locking in yields for a longer period of time.
'Scary Ride'
With yields so low now, an inflationary shock of any sort would be devastating, as rates would spike in response. Ben Inker, director of asset allocation at GMO, a Boston money manager, calculated what the damages would be if, say, yields on Treasury bonds went up just three percentage points, driving prices down. The answer: a 23.5 percent loss for the 10-year Treasury and a 40.7 percent loss for the 30-year bond.
While no one expects a big jump in inflation in the near term, "I see the likelihood of an inflationary shock as a high probability," says Thomas Atteberry, manager of the FPA New Income Fund, which has never had a losing year since its 1984 inception. Atteberry expects inflation to pick up in the next three to five years.
It could come as an unpleasant surprise, as in 1974 when OPEC flexed its muscle and U.S. inflation topped 12 percent. It can also happen as a result of war. After Iraq invaded Kuwait, consumer prices rose at more than a 6 percent rate in the fall of 1990. Inflation also rises in less traumatic periods: It blipped above a 4 percent annual rate in the spring of 2006 and above 5 percent during the summer of 2008.
Add onto that four or five percent inflation rate a small 'real rate' of interest, which investors typically demand, and you could be looking at 6 percent Treasury rates.
Inker and GMO are well-known for their seven-year projections for asset classes, which have been very accurate. "Our expected return is that the 10-year Treasury note loses 1.3 percent a year after inflation," says Inker.
For the complete article.
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