Bond investors have significant risks lurking in their portfolios according to many experts. U.S. Treasury securities are priced for recession and very expensive. Yields are at historic lows. Inflation is highly probable before this decade is out, according to experts. Even a modest rise in interest rates would kill long and intermediate term U.S. Treasury bonds. One advisor who ran the numbers found that a rise of 3 percent in Treasury yields would result in a 40.7 percent loss on the 30-year bond and a 23.5 percent loss on the 10-year. Many money managers and advisors are avoiding U.S. Treasuries. A recent InvestmentNews headline reads: “Disastrous bond rout just up the road, experts warn.”
Nevertheless, risk averse investors continue their flight to U.S. Treasuries because, despite the downgrade and the debt problems that led to it, the risk of default is still considered to be the lowest in the world. In exchange, these investors appear willing to accept the risk of a drastic decline as well as the prospect of negative real yields (i.e., yields adjusted for inflation).
Cash holdings are at their highest since the record levels of 2008. Many experts would advise investors to stay in cash, and those who venture out of cash to stick with short-term bonds. Some advisors say that the prospects for municipal bonds have improved since 2009. Defaults are rare. For what it’s worth, Congressman Barney Frank, a co-sponsor of the Dodd-Frank financial reform law, told reporters on CNBC’s Squawk Box on September 21 that most of his savings are in municipal bonds.
Investor attorney J. Boyd Page cautioned: “Investors need to be very careful because there are not a lot of safe havens. Despite the safety of flight into them, U.S. Treasuries have their own risks. The market price of U.S. Treasury securities will decline, perhaps drastically, when yields eventually rise. Despite reports that the municipal bond market has improved, many state and local governments remain on shaky financial ground. Even bonds issued by financially sound governments have interest rate risk; the longer the maturity, the greater the risk.”
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