What to do when Treasuries are No Longer Safe?

So on the week-a-versary of the U.S. Credit Rating Downgrade by Standard & Poor’s, it looks like investors are acting even more irrationally then before the downgrade. The yield on 3-month U.S. Treasury Bills is 0.01%. The 12 month T-Bill is a whopping 0.10%. This is the exact opposite of what many had predicted while arguing about raising the debt ceiling. However, gold has easily added another $100 an ounce in value as expected from a US credit downgrade. Silver, which had been on a parabolic rise earlier in the year and then sold off, has not had any appreciable move up or down.

The stock market as measured by the Standard & Poor’s 500 index or Dow Jones Industrial Average has sold off as expected and looks even more precarious than before. This is not a big shock and is the obvious source of why US treasuries are yielding next to nothing. Combined with the fact that the European Union is coming apart at the seems, it is no surprise that investors are seeking safety. Unfortunately, the one asset investors have historically turned to for safety in times of panic has been downgraded.

Some of the largest figures in the investment world have struggled and will continue to struggle under this new paradigm of investing. Investment titans such as Warren Buffett and Bill Gross have been struggling to get or hold onto positive returns. More and more baby boomers are facing the prospect of retiring with not enough savings. Professional money managers struggles and failures have driven a self managed marketplace that makes buying and selling decisions on technical models, emotion and ignorance of economic fundamentals.

In a lot of ways, this new paradigm is much the way it was over a century ago when people did not rely on the Federal Government or any of its guarantees in the marketplace. When the Federal Government is charged with tasks that really were not set out from the original charter of the US Constitution, such as creating secondary mortgage markets or even worse carbon credit markets, it will fail and all of the citizens will pay the price. For those that relied most heavily on such a system, the pain will be felt the greatest.

For those who are not fearful, there may not be a better time to invest. It is obvious markets are anything but rational or efficient. The increased volatility brings more risk, but may bring the savvy, cool headed, tactical asset allocator an extra windfall. Those still investing in diversification and long time horizons, also known as buy and hope strategies, will lag behind in returns or experience asset destruction.  This can be especially devastating to a retirement portfolio too heavily invested in stocks and bonds.

U.S. Bonds and bills are perhaps the riskiest of all investments. None of the rhetoric coming out of Russia, China or other developing countries has had much impact on the value of U.S. debt, but at these price levels and low interest rates it couldn’t be a better time for a foreign sovereign nation to diversify out of U.S. Treasuries.  The rating agencies still rate corporate debt AAA along with some very enticing developing and developed foreign countries. These safe havens will be a safer investment and better yielding place to keep a portfolio’s powder dry.

No matter what the markets may bring or the investments you hold onto to build your financial security, I am there to help my clients with prudent investment discipline, and of course, the best tax planning, so you can keep your hard earned capital gains and retirement income.

 

 

About this Author 

John Beidle is an enrolled agent who specializes in helping entrepreneurs, small business owners and real estate investors pay the least amount of tax as legally possible.

About The Author

John Beidle

John Beidle is an enrolled agent who specializes in helping entrepreneurs, small business owners and real estate investors pay the least amount of tax as legally possible.

2 Comments

  • John Beidle

    May 29, 2012

    I wouldn’t mind that at all. Thank you for the kindness.