| U.S. Treasury bonds are the safest investment in | | | | who were - don't realize it. |
| the world. | | | | They are so busy patting themselves on the |
| However, that doesn't mean they can't be | | | | back for eliminating default risk - and picking up a |
| dangerous. Far from it. | | | | 4% yield versus next-to-nothing on the short end |
| Yet a few days ago, The Wall Street Journal | | | | - that they are forgetting about interest rate risk: |
| reported that, "Long-dated Treasury securities are | | | | the risk that higher inflation will send long yields |
| now the most favored financial assets for global | | | | soaring and bond prices crashing. |
| investors fleeing the eurozone's debt crisis." | | | | Don't Let the Government Trick You into |
| Talk about jumping out of the frying pan and into | | | | Speculating |
| the fire... | | | | Seth Klarman, President of the Baupost Group, an |
| Don't get me wrong. I'm not one of those | | | | investment firm in Boston that manages $22 |
| end-of-the-worlders who expect the U.S. | | | | billion, says the U.S. government is inadvertently |
| government to default on its sovereign obligations. | | | | provoking its citizens into taking very bad risks |
| That won't happen.<!--more--> | | | | right now. |
| It wouldn't even be necessary. After all, history | | | | How? |
| shows that governments always prefer to inflate | | | | "By holding short-term interest rates near zero, |
| their way out of a debt crisis by cranking up the | | | | the government is basically tricking the population |
| printing presses instead. That way they can | | | | into going long on just about every security |
| achieve a de facto debt reduction simply by | | | | except cash, at the price of almost certainly not |
| devaluing the currency. | | | | getting an adequate return for the risks they are |
| If you've seen the photographs of German | | | | running. People can't stand earning 0% on their |
| citizens hauling wheelbarrows full of cash into the | | | | money, so the government is forcing everyone in |
| bank during the days of the Weimar Republic, you | | | | the investing public to speculate." |
| know what I'm talking about. | | | | Of course, most people aren't exactly in a |
| Of course, I don't expect inflation like that. And | | | | speculating mood right now. |
| neither should you. | | | | So what are they doing? They're buying super |
| But what kind of inflation does an investor expect | | | | safe long-term Treasuries and earning over 4%. |
| who loans his money to the government for 30 | | | | Except that's not a safe investment - as many |
| years at a rate of just 4.1%? | | | | will eventually learn to their chagrin. |
| Why U.S. Treasury Bonds Could Bulldoze Your | | | | Good investing, |
| Portfolio | | | | Alexander Green |
| That 4.1% figure is the current yield on the long | | | | Editor's Note: Are you concerned about the |
| end - and it's a bet that has a little upside potential | | | | direction in which America's elected officials are |
| and a whole world of downside risk. Why? | | | | taking the country? Worried about ever-increasing |
| Imagine a seesaw with interest rates and inflation | | | | debt levels? Fearful of major inflation down the |
| on one end and bond prices on the other. If | | | | road? |
| inflation goes down, bond prices go up. And | | | | Many investors are - and it's hardly surprising. |
| vice-versa. | | | | But did you know that since 1987 - through bull |
| But how far down can rates go on the long end? | | | | markets... bear markets... inflation... deflation... debt... |
| Unless we have the sort of deflationary | | | | unemployment... and the rise and fall of America's |
| environment that Japan suffered in the 1990s, the | | | | biggest companies - one organization has helped |
| appreciation potential here is minimal. | | | | its members generate approximately $19 billion in |
| On the other hand, if inflation rears its ugly head, | | | | wealth? |
| long bonds will get clobbered. And the worse | | | | How? Through a simple, diversified, disciplined |
| inflation gets, the worse these bonds will do. | | | | investing approach, with the twin goal of both |
| I realize that inflation is not an immediate threat. | | | | building profits and protecting wealth in any |
| Technology and deregulation have brought costs | | | | climate. |
| down over the past decade. And even oil prices | | | | No matter whether you're focused on the short |
| have moderated lately. | | | | term, or long term, you'll find various portfolios |
| But if the bond market gets even a whiff of | | | | and investments tailored to your individual |
| higher inflation, these bonds will drop like a stone. | | | | situation. We invite you to join this exclusive and |
| And I'm betting that investors who weren't | | | | elite group of investors. |
| around during the early 1980s - and even many | | | | |