The Most Hated Asset Class

Treasuries, of course. Now full disclosure – I’m really, really long Treasuries – half straight bonds, half strips. The argument is made that the US government is over its head in debt, and lending money to it is a really bad idea from a credit point of view. Not only that, you are getting paid less than consumer inflation and so you are losing money. Also, Bernanke is going to print money like crazy, destroying the value of the dollar and driving interest rates sky-high, thius killing the value of Treasuries. Etc., etc., etc.

All of that misses the point. There is a lot of money out there which has to be invested in something. So where are you going to keep your money?

  • Stocks? Well the S&P 500 dividend yield as of this morning is 2.07% with a duration that is just less than 50 years, and it is trading at a price no higher than it was in 1999.
  • Commodities? Don’t yield any income, and are trading at 2004 prices as well as being in a steep downtrend.
  • Real estate? Fishing for a bottom in a global property bubble? Let’s just say – not for the faint of heart.
  • Hedge funds? On average, losing money for their clients. Fees are too high, performance is blah.
  • Gold? Has certainly had great price appreciation over the last few years, but like other commodities yields no income, is extremely volatile, and is in a solid downtrend since the middle of last year. Also is a pretty small market if you have many billions to invest.
  • Overseas? We don’t need to discuss Europe, China is facing a hard landing, India is soft, the commodity countries are locked into the commodity price decline.

Now look at Treasuries. A nice solid, uninterrupted, 30 year uptrend on price, 30 year bond yielding 2.7% with a 20-year or so duration. A little volatile, perhaps, but what can you do.

Bernanke is going to destroy the value of Treasuries? The same Bernanke who is buying them to keep mortgage rates down? Really? Inflation is going to be a big problem with high unemployment and declining commodity prices? Really?

Yes, the US is in terrible shape from a debt point of view. But still, the US can print all the dollars it needs to avoid default on Treasuries. Yes, if interest is the only return, then you are getting paid less than consumer inflation. But it isn’t.

It’s OK to hate Treasuries. I like it when I read all the reasons not to buy Treasuries. When Treasuries are being loved, then I’ll be gone.

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  • By Error Correction « Financial Reality on June 17, 2012 at 10:31 am

    […] mentioned in my recent post about Treasuries that you were getting paid interest at a rate less than consumer inflation. That was wrong then […]

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