The Treasury as a Growth Investment

Posted: May 03, 2012 12:01 AM

I’m continually reminded by my colleagues in the media, the financial world, and fellow economists that purchasing of any kind of government bond is insane. 

One radio personality in particular keeps pounding the airwaves asking why any right thinking investor would want to tie his or her money up for the next ten years and earn a paltry 2% yield. 

Given the current state of inflation and with supposed hyper-inflation on the horizon, it would seem to be a losing investment. 

For a meager cash-flow, risk appears to be huge. 

Ahhh, grasshopper, that is where you miss the change in objective. 

I thoroughly agree that Bernanke has given no gifts to the fixed income investor by keeping rates artificially low, though he is revered in banking circles. 

However, the continual economic slowdown exhibited both domestically and internationally will force the Fed to maintain this low interest rate environment for several more years. 

From Janet Yellen to Daniel Tarullo and most Fed officials in between, this very same strategy is confirmed. 

For the past few years we’ve seen the 10-year treasury in a trading range from approximately 2.75% to 1.75%.  

As I write this column, the 10-year is trading at 1.93%, near the low-end of the range.  Understanding that as interest rates go lower, bond prices go higher, the entire reason for owning treasuries has changed. 

The majority of my peers believe this trading range is the last in the thirty-year bond bull market and since the 10-year is approaching the bottom of the range, rates can only rise from here. 

This trading range, however, can and will be broken and move lower as more and more real data regarding world events appear. 

The next several months will feature worldwide elections, rising oil prices, and increasing geopolitical concerns creating not only consternation but fear turning into panic as well.  When that happens, the so-called trading range will be broken to a lower low. 

Bond prices will rise and the whole reason for owning treasuries will finally be understood. 

When German bonds were recently sold at a negative yield because investors wanted a safe place to stash money it definitely opened the door to a much lower yield for the U.S. treasury market. 

After all, zero really is the bottom of the scale, and potentially the bottom of the trading range. 

My take: Less than a 1% yield on the 10-year in under a year and that makes the capital gains potential dramatic, the real and only reason to own treasury bonds. 

Who would have thought that a treasury could be a growth investment?