By Jonnelle Marte
Just how low can Treasurys go? As the Dow Jones Industrial Average was falling more than 400 points today, the yields on Treasurys plunged to a new all-time low, falling below the 2.0% mark for the first time. For many advisers and investors, the drop served as another wake-up call that it may be time to ditch the government bonds.
Bill Gross, the fund manager of the world’s largest bond fund at Pimco, has long been bearish on Treasurys, but also said recently that a recession is likely. (Which would actually be good news for Treasury bonds.) And in the past few months several advisers and bond fund managers have also moved out of the government bonds, which pay low yields and are most susceptible to losses from rising interest rates, analysts say. That’s what pushed Russell Francis, a financial adviser in Beaverton, Ore., to move his clients largely out of Treasurys a month ago. “The yields are so low right now that they pretty much have nowhere to go but up over the next six months to a year,” says Francis.
Despite their low yields, investors continue to flock to Treasurys for their liquidity and low credit risk. The bonds rallied Thursday as fears of a global economic slowdown peaked, pushing yields to their new low. (Bond yields fall when rates rise and vice versa). But critics say the rally can’t be sustained and worry the bonds, especially those with longer maturities, are likely to lose money if interest rates rise. Their low yields mean investors have little cushion to protect themselves from such losses.
“Owning Treasurys right now just means you’re not getting much of a return and it means you’re taking on a lot of interest rate risk,” says David Morgan, a principal with JMG Financial Group, a financial advisory firm based in Oak Brook, Ill., who recommends his clients hold Treasury Inflation-Protected Securities to guard against inflation, but doesn’t allocate money specifically to pure Treasurys. Francis is instead creating bond ladders with municipal bonds, Build America Bonds and investment grade corporate bonds. He says holding individual bonds instead of investing through a mutual fund protects his retiree and pre-retiree clients from price movements due to interest rate changes. By holding their bonds to maturity they can be sure to get their principal returned in full. The yield advantage they have over Treasurys could also offset losses due to rising rates, he says.