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government bonds rates

  • Featured Story

    The Treasury Investment That's WAY Better Than Treasury Inflation Protected Securities (TIPS)

    By , Money Morning - October 26, 2011

    To continue reading, please click here...

Article Index

  • The Treasury Investment That's WAY Better Than Treasury Inflation Protected Securities (TIPS)
  • A Sovereign-Debt-Default Survival Kit: The Four Countries That Will Keep Their AAA Ratings

The Treasury Investment That's WAY Better Than Treasury Inflation Protected Securities (TIPS)

By , Money Morning - October 26, 2011

I've made no secret of my aversion to Treasury bonds. Yields right now are irrationally low, and thus do not accurately reflect U.S. credit risk.

And since inflation is already running higher than bond yields - and is likely to rise even further - Treasuries offer an inadequate return at best, and at worst, a capital loss if sold before maturity.

Even Treasury Inflation Protected Securities (TIPS) aren't as safe as you might think.

Fortunately, the U.S. Treasury is finally thinking about issuing something useful: Floating rate notes (FRNs).

If the Treasury does end up issuing FRNs, and the pricing is reasonable (and the U.S. Treasury still has a credit rating better than junk bonds), then you should seriously consider buying some.

Don't Trust TIPs

Floating rate debt issues are not that common here, but there have been many in Europe. They were even more common in my early banking days in the 1970s - when interest rates were generally rising.

FRNs have one great advantage over fixed-coupon bonds: If interest rates go up, fixed-coupon bonds go down, sometimes by a lot if the bonds have a long time to maturity.

For example, if 30-year interest rates rise from 4% to 5%, the trading price of a 30-year bond ($100 face value) will drop to $84.48. If you were to sell at that point, you'd lose 15% of your principal - the equivalent of nearly four full years worth of interest.

However, a floating rate note on a good credit rating should always trade near par. If short-term interest rates go up from 1% to 5%, the note will pay 5% in the next interest period, so it will still trade close to par. That means you have principal protection as well as interest rate protection.

Theoretically, TIPS should offer similar protection. And they do if interest rates always stay at the same margin above inflation. But in periods like the present, interest rates trade below inflation, so the price of TIPS gets bid up above par.

Today, 10-year TIPS yield only 0.19% and 30-year TIPS yield only 1.00%. Since real bond yields in normal markets should be in the 2% to 3% range, there is potential for the loss of principal here. Indeed, in real terms there is a certainty of loss of principal - the "on-the-run" 30-year TIPS trade at a price above $128, so over the next 30 years you are bound to turn $128 into $100 in real terms - not a good deal.

Sidestepping Uncle Sam

Additionally, there is another problem with TIPS: The government sets the price index to which TIPS are linked. And if you think the government is too honest to fudge the price statistics to make its debt cheaper, I have some sad, disillusioning news for you.



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A Sovereign-Debt-Default Survival Kit: The Four Countries That Will Keep Their AAA Ratings

By , Money Morning - July 19, 2011

Stories about debt downgrades and sovereign-debt defaults are dominating the headlines.

And it's no longer just Europe that we have to be worried about. On Friday, Standard and Poor's warned that there was a 50-50 chance that the United States would lose its AAA debt rating in the next 90 days - even if the debt ceiling didn't result in a U.S. default.

When you get right down to it, we're all asking the same urgent question: Just where the hell can I go for a really safe investment?

Fortunately, I have an answer for you.

The Sovereign-Debt-Default Survival Guide

S&P put us on notice back in April, when the ratings agency affirmed the country's AAA/A-1+ sovereign credit ratings - but also cut its outlook on the United States' long-term debt rating from "stable" to "negative." The last time that happened to the United States was 70 years ago - right after the attack on Pearl Harbor. What S&P is talking about now, though, is a reduction of the country's actual credit rating. For years, investors throughout the world have viewed U.S. government debt as the "safe haven" of last resort.

With a cut in the country's credit rating, those days would be over.

If you're searching for alternatives to U.S. debt, the good news is that Standard & Poor's has granted 18 other countries that top AAA credit rating. The bad news is that the selection isn't as luxuriant as it first appears.

It's important to separate the prospects from the suspects.



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