Long-Term Treasury Bonds: Consider Yourself Warned…
by Alexander Green, Chief Investment Strategist
Monday, July 26, 2010: Issue #1309
The brickbats are starting to pour in.
For months, I’ve warned readers about the bubble developing in long-term Treasury bonds.
Yet what was the top-performing asset class in the first half of 2010?
You guessed it: Long-term Treasury bonds, with a total return – price gains plus interest – of 13.2%.
Why is this happening? Two reasons…
- U.S. stocks performed poorly over the first six months of 2010 – down 5.6%. That’s driving many to the perceived safety of Treasuries.
- The anemic euro is making U.S.-dollar-denominated securities attractive to international investors. And Treasuries are the traditional choice for those fearful of equities.
So does this mean there isn’t a bubble after all? Hardly. In fact, the risk now is greater than ever…
1999: An Internet Odyssey
In the fall of 1999, I belonged to a ritzy tennis club – a time when Internet and technology stocks were all the rage.
My playing partners knew I was in the money management business, so there was plenty of chatter among them about “the New Era” and how “the Internet changes everything.”
Occasionally, one of my buddies would ask which Internet stocks I was buying.
“None,” I said. (I was early to get into the sector and early to get out.) The valuations were outrageous and I didn’t think it would end well.
They were surprised by this view, but kept enthusiastically buying and trading Internet stocks like almost everyone else. And, indeed, those stocks kept right on going up.
As the weeks went by, a familiar ritual developed. I’d walk up to the group and – knowing I didn’t own any – they’d ask how my Internet stocks were doing.
Laughs all around.
This went on week after week, month after month. And judging by the guffaws, the question was funnier each week than the week before.
Until one day it wasn’t funny at all.
2000: Nightmare on Wall Street
In March of 2000, the Nasdaq started coming apart and Internet stocks nosedived. As I approached their courtside table one morning, they abruptly stop talking.
“Morning, guys,” I said. “How are your Internet stocks doing?”
Funny… that line was hilarious before. Now it generated obscene gestures, as well as various suggestions for me and “the horse you rode in on.” Hmm.
What is the lesson here (other than that we shouldn’t laugh at the misfortunes of others)?
It’s that you cannot make a rational judgment about when irrational behavior will end.
The “Twin Demons in the Distance” For Treasury Bonds
Internet stocks went up longer than any logical analysis would predict. So did home prices a few years ago.
And the situation with long Treasury bonds right now also defies analysis. Unless, of course, we’re headed into a massive, deflationary period. But if that’s the case, why are gold and inflation-adjusted Treasuries (TIPS) moving up, too?
Either buyers of gold and TIPS are wrong – or buyers of long-term Treasuries are wrong. I think you know where I stand.
As The Wall Street Journal reported on July 6: “The huge stimulus the Federal Reserve and U.S. government have provided to the economy over the past few years will inevitably push up both interest rates and consumer prices. While the threat isn’t imminent, it’s not too early to take steps to protect the bond part of your portfolio from those twin demons in the distance.”
Consider yourself warned.
Good investing,
Alexander Green
Any investment contains risk. Please see our disclaimer.
4 Responses to “Long-Term Treasury Bonds: Consider Yourself Warned…”
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Alex: I enjoy reading your articles but couldn’t draw the obvious conclusion which you mentioned.
Are you saying the long term treasury is overpriced,as well as gold and TIPS? hence, they are going to crash! But within what time period?
Appreciate a straight answer.
Carpe Diem;
Sam
Reply
Ok!! So if not long bonds ,(which i have) then tips? ( which I also have ) where is the place of safety for one wanting not to chance what I have for retirement.. gold, real-estate, WHAT??
WHAT SAY YOU Mr.GREEN..
Dave…
Reply
Alex I agree though have not fared well with shorting them through TBT because of the time held. However I find it curious that you have not suggested altering the percent of bond funds held in the “Gone Fishing” portfolio. Maybe the funds don’t hold much in the way of US treasury bonds but won’t all bonds perform poorly once the tide turns? Could you address this?
Thanks for all you do, I always enjoy your candor and clear train of thought.
Bob M
Reply
Sam and Dave,
If inflation comes back, long-term Treasuries will tank but TIPS will soar. Remember, these bonds will rise with the CPI. (Both the principal value and coupon payments are inflation-adjusted.) So these securities are a perfect inflation hedge. Gold, on the other hand, is not. During the two decades from 1980 – 2000, for example, gold bullion went nowhere but down, despite the fact that inflation hardly vanished during the period. Gold shares, however, still did well. That is why we recommend you keep at least 5% of your liquid assets in high-quality gold shares.
Good investing,
Investment U
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