Seeking Safety in Long-Term Treasuries
Since the ﬁnancial panic of late 2008, U.S. stocks have posted positive returns for six consecutive calendar years. As of this writing, major market indexes are not far below record levels. Although the future is unpredictable, it’s possible that a moderate or even a sharp reversal will occur.
Concerned investors might reduce allocations to stocks and raise their holdings of bonds, especially long-term U.S. Treasuries, which historically have offered a safe haven in tumultuous times. In 2008, for instance, most investments plunged, but long-term Treasuries thrived— Morningstar reports that long-term government bonds returned almost 26%. When the going gets tough, many investors get going into U.S. government bonds with maturities over 10 years.
With or without a stock market setback, long-term Treasuries have appealing features. There’s little risk that investors will not be repaid by the borrower—the federal government. They are easy for individuals to buy; just go to www.treasurydirect.gov/tdhome.htm and provide the requested information. There are no fees for buying or holding Treasuries there, and the minimum purchase is just $100.
As you might expect for a safe investment, yields on long-term Treasuries are modest in today’s low yield environment. Yet, they’re not negligible. Currently, long-term Treasuries yield from 2% to 2.5%, depending on years to maturity. That’s more than bank accounts and money market funds are paying now. When you buy long-term Treasuries, you’re locking in that yield for the next 10 to 30 years.
If you prefer to invest through funds, you can choose among many that hold long-term Treasuries, including some with very low expenses for investors. Yields typically aren’t locked in because these funds keep acquiring additional issues, with higher or lower yields. Today, some popular long-term government bond funds have yields of 2.6% or higher.
What’s more, interest from Treasury bonds is exempt from state and local income tax. Thus, Treasury issues may appeal to residents of high-tax states and localities.
Predicting interest rate movements and the impact on bond prices is always difficult. Nevertheless, there are some positive signs for long Treasuries now. Historically, interest rates have moved higher— driving bond prices lower—during inﬂationary times. Inﬂation currently does not appear to be a major concern, especially with oil prices at reduced levels.
In addition, the U.S. dollar has been appreciating versus other currencies, and a strong dollar may create worldwide demand for U.S. government bonds. Altogether, low inﬂation and a robust dollar might keep the price of long- term Treasuries from falling. Some ﬁnancial advisors believe that allocating about 10% of an investment portfolio to long-term Treasuries is prudent now. These bonds may offer decent yields as well as a hedge against possible weakness in economic growth, corporate proﬁts, and stock prices.
Nevertheless, long-term Treasuries can pose concerns for investors. Locking in 2%–2.5% yields for 10 years or longer might not turn out to be a good decision if interest rates rise from today’s low levels. Higher interest rates will bring down bond prices, and long-term issues usually suffer the largest loss of principal.
In 2009 and 2013, long-term government bonds lost 15% and 11% of their value, respectively, while intermediate-term government issues lost only 2% and 1%. To some skeptics, buying long-term Treasuries today means putting risk into supposedly safe government-backed securities, and 2%–2.5% yields don’t justify taking such risks.
Indeed, today’s interest rates are as low as they’ve been since the post- World War II period. Subsequently, long-term government bonds returned barely 2% a year from 1951 through 1981, less than half the annualized rate of inﬂation, which was over 4%.
If you have doubts about long- term Treasuries, what investments might provide steady income as well as a hedge against a potential stock market slide? Options range from dividend-paying stocks to shorter- term Treasuries to municipal bonds. No investment is without risk; long- term Treasuries have their strong points, but you should consider all the possible consequences of including them in a diversiﬁed portfolio.