Oppenheimer: the risk of bonds

 

We try to make people aware that there is risk to everything, even things that are “guaranteed.” 

It’s the trend that has Wall Street abuzz. For the first few weeks of the year, investors put more money into stock mutual funds than they took out, a trend that hasn’t happened much since the financial crisis. But focusing on what’s happened since the calendar turned is missing a much bigger issue. Investors, spooked by a seemingly endless parade of potential disasters, poured and, in many cases, are still pouring hundreds of billions of dollars into so called safe-haven bonds like Treasuries, which are backed by the full faith and credit of the U.S. Government. That decision has kept many from reaping the full benefits of the stock market’s rally. More importantly, that desire to feel ‘safe’ soon could wind up doing a lot of harm.

I believe Treasuries are far riskier than people likely imagine. Indeed, Treasuries have become fairly speculative at this point.  The stated yields on most U.S. Government bonds are below the rate of inflation.  Real yields, the effective value of a bond’s interest payment after taking inflation into account, are less than zero!  To believe Treasuries will hold their value is to believe that inflation will fall or go negative, something the Federal Reserve’s money printing makes only a remote possibility.  The deflation scenario is what we call a “tail risk,” something at the far end of a normal bell curve of outcomes.

If you have questions about bonds and their place in your portfolio, contact us.

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