Markets

Are U.S. Treasuries Still a Good Bet?

As this year comes to a close, U.S. Treasuries have recorded impressive gains, despite questionable fundamentals and calls of doom.

Since the beginning of the year, intermediate Treasuries (NYSEArca: IEF) increased by around 16% in value, while longer term Treasuries (NYSEArca: TLT) jumped by dizzying 36%. By contrast, other major investment categories like U.S. stocks (NYSEArca: VTI) have declined around 2.25%, while international (NYSEArca: EFA) and emerging market stocks (NYSEArca: VWO) have done even worse.

Despite a mid-year debt ceiling crisis, a credit downgrade for the U.S. government, and no real significant headway in lowering national debt, none of it sank U.S. Treasuries. While many forecasters were telling their clients to short Treasuries, ETFguide correctly alerted its subsribers that more upside was ahead.

Even though 2011 was great for government bonds (NYSEArca: EDV), what lies ahead? Are the big gains over or is more still ahead?

Falling Credit Ratings

The U.S. government losing its coveted AAA-rating was one of the biggest financial events of 2011. Among the big three rating agencies, Standard & Poor's was the only one with enough guts to downgrade America's credit score. And they took flack from both lawmakers and even Warren Buffett.

S&P cited a 'material risk' that the U.S.' political leaders could fail to gain control of the country's soaring debt and budget deficits if they don't agree on solutions. S&P is forecasting that national debt will rise to 84% of gross domestic product by 2013. Is anybody in D.C. paying attention to this? Good, I didn't think so

Now that credit raters have finally, ever so hesitantly, joined the alarm squad - here's another alarm: today's credit ratings still don't reflect the true credit risk of lending your money to D.C.'s financial drunkards.

Europe is a Mirror

In many ways, the declining creditworthiness of eurzone members like Greece (NYSEArca: GREK), Portugal, Ireland (NYSEArca: EIRL), and others is a microcosm.

The fact is over-indebtedness is not just a European problem, but a global issue that confronts other sovereign nations like Japan along with the U.S.

Unfortunately, Europe's current financial crisis is probably an ugly preview of what's to come both here and abroad. As a result, having the correct investment strategy with U.S. Treasuries is imperative. The academic view touted in outdated college textbooks that Treasuries are a 'risk-free' asset class has never been more wrong.

The Anti-Treasury Crowd

Perhaps no investment category has confounded Wall Street's leading minds more than U.S. Treasuries. Bill Gross, manager of the Pimco Total Return Fund (Nasdaq: PTTAX) has been one of today's most vocal critics of U.S. government bonds.

In a shot at the traditional view that investment portfolios should always have exposure to government debt, Gross said,

'Old-fashioned gilts and Treasury bonds may need to be exorcised' from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint.'

Multibillion dollar bailouts and bankrupt entitlement programs like Social Insecurity have gotten the government into a fine mess.

'To rebalance debt loads and re-equitize financial institutions that should have known better, central banks and policymakers are taking money from one class of asset holders and giving it to another. A low or negative real interest rate for an extended period of time' is the most devilish of all policy tools,' said Gross wrote earlier in the year.

Although Gross' view is probably right, his timing wasn't. Anyone who sold Treasuries on his advice have watched them soar like an eagle.

Conclusion

Why have Treasuries gone up so much and is the run over?

The ETF Profit Strategy Newsletter from ETFguide in the January 2012 issue looks at Mega Investment Trends for next year, including the future for U.S Treasuries. It analyzes overlooked factors about Treasuries and reasons behind the next big move.

Along with that, ETFguide's newsletter lists specific actionable ETF strategies for investing and profiting with the government's debt crisis in view.

Ron DeLegge is the Editor of ETFguide.com and Author of 'Gents with No Cents: A Closer Look at Wall Street, its Customers, Financial Regulators, and the Media' (Half Full Publishing, 2011).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

ETFs

Latest Markets Videos