Saturday, July 10, 2010

Bond Funds Are NOT Safe Investments

US Treasury bonds are considered to be the safest investment in the world. However, that does not mean that they cannot be dangerous to your financial health.

Investors - frustrated by the microscopic yields on money market funds and certificates of deposit - have poured money into longer-term Treasury funds. These funds come in the form of mutual funds or exchange traded funds (ETFs).

Investors' thinking about these Treasury funds is simple...too simple.

They say to themselves: "These funds yield over 5%, which is great in this economic environment. And the bonds the funds hold are guaranteed by the US government. What's there to worry about?"

Actually, plenty.....

Even if one considers Treasuries to be free of credit risk (which is debatable), they are NOT free of interest rate risk.

When interest rates go up, bond prices - even Treasury bond prices - go down.

With interst rates so low right now, they can't go much lower...they can only go up. Despite the current complacency about interest rates not going higher for many years by most investors, higher interest rates are coming.

Higher interest rates are an inevitable result of ballooning federal government debt. Consider the following:

Over the past 18 months, the federal debt has surged from $5.5 trillion to more than $8.6 trillion.

Two years ago, federal debt was 38% of the nation's GDP or economic output. Today, it is nearly 60% of GDP. And by the Congressional Budget Office's own estimates, it is going much higher.

And that does not even take into consideration the federal government's unfunded liabilities for programs such as Social Security and Medicare. These unfunded liabilities are conservatively estimated to be in the $55-$60 trillion range.

If the economy falters, and with short-term interest rates already at near zero, Uncle Sam will surely opt to increase 'stimulus' spending even more dramatically.

This increased government debt will put even more pressure on interest rates to move higher.

One main reason for that will be that global investors will question US government spending policies and whether they will ever be paid back the amount owed to them by the United States.

Global investors may demand a 'risk premium' (aka higher rates) as they have with Greece and some other European nations. That is why all the talk in European nations currently is about austerity and budget cutbacks.

My advice to investors is that there is still time to get these ticking time bombs out of your portfolio. Please do so or you will learn to your chagrin that these are not safe investments.


  1. Its very interesting to read this types of matters....Its very safe to all the people...Thanks for sharing this useful informations with us.....


  2. Great article! And thanks @Freda for sharing