There is one investment that has been considered
the crème de la crème of safe investments since 1917 - when
the US Government sold its first "Liberty Bonds." Liberty Bonds
helped to fund World War I, and were the predecessor to what we
now know as U.S. Treasuries.
Owning U.S. bonds has long been considered both patriotic and
a safe place to store your cash. After all, funding our
government's wars and roads makes us feel proud to be Americans.
And historically, the government of our great country has been
the premier borrower.
But that was the past.
What you need to know is that U.S. Treasuries are fraught with
risk and the potential for sizable losses. I've been saying this
a lot recently, and I'm saying it again today because this is so
important. I simply don't want you to be crushed by the coming
bursting of the bond bubble.
Owning bonds - including "super safe" U.S. Treasuries - will
lead to a world of pain.
That's because your investment will die either a slow death or
a fast death. Let me explain…
The slow death will occur if you own bonds like the 10-year
U.S. Treasury that's paying a 2.5% yield. This yield barely keeps
pace with current inflation of 2 - 3%. Essentially you're earning
no money by investing in Treasuries today, and if inflation rises
slightly you'll be in the hole.
The same is true of many other low-yield fixed income
investments, including foreign bonds, muni bonds, and even many
The fast death for bond investments happens if interest rates
start rising. Ben Bernanke's mere threat of ending QE3 sent the
yield on the 10-year Treasury rising 50% since May.
That sharp rise in yield has losses already piling up for bond
investors. Just look at one of the biggest bond
iShares 20 Year Treasury Bond (
. That "super safe" bond ETF that invests ONLY in 20-year U.S.
government bonds fell by 13% in two months.
U.S. Government Bond Fund Plunges 13%
Perhaps the most important thing to keep in mind is that these
losses are just the start.
The yields on bonds are rising, and when they do, principle
prices fall. As we saw recently, yields have started
increasing with just a few comments from the Fed Chairman.
Consider what might happen when Bernanke raises the prime rate
on Federal funds from 0.25% today to a more reasonable 1% or 2%.
It could happen sooner than you might think.
When that happens, the 13% losses experienced in the last two
months will seem tiny.
The patriotic thing to do today is to sell your U.S.
A far better investment is America's best corporations.
After all, our country's thriving economy was built on the backs
of entrepreneurs and innovators who built thriving enterprises in
our country's capitalist system.
As always, you have an opportunity to buy the best of these
companies on the stock market. And to sweeten the opportunity,
you can do so today at historically reasonable valuations.
of July…I'll be back on Monday, July 8
with your next issue of
Income & Prosperity.
Enjoy the long holiday weekend.