Bond prices fall: time to sell US Treasuries? Saturday, October 29 - 2005 at 09:48
Many big investors keep a large portion of their wealth invested in US Treasury bonds. Over the past few weeks this previous safe haven for investment has started to slide on the back of rising interest rates. So is this the end of the long bond bull market?
Many big investors keep a large portion of their wealth invested in US Treasury bonds. Over the past few weeks this previous safe haven for investment has started to slide on the back of rising interest rates. So is this the end of the long bond bull market?
Bond sell-off in progress A higher interest rate environment is bad news for bond holders who have bought bonds at a fixed rate. If interest rates go up then their bonds will be worth less money. Hence the bond market sell-off which naturally adds to downward momentum in prices.
Should US Treasury bond holders therefore exit the market now? One contrary argument is that US equities may crash, and that would produce a rally in the bond market, albeit possibly a short-lived one, due to the likely easing of interest rates to head off the impact of a stock market crash on consumer spending.
On the other hand, investors can see their US Treasury bonds falling in value today, and may not be so concerned about what might or might not happen tomorrow. From the point of view of technical analysis US Treasuries have broken out of their upward trading range - the classic indicator of a market that has changed direction.
So what should investors do to preserve the value of their assets? After all with inflation at 4.7% in the US holding cash in a bank deposit is yielding a negative return.
Alternative investments It is also hard to make a case for equities with interest rates heading upwards, and inflation putting cost pressures on profits, and indeed all the major US stock indices are lower today than at the start of the year which suggests investors have taken this argument on board.
Real estate is also clearly something to avoid with interest rates rising - and putting pressure on those who financed their deals with loans that will now prove too expensive to service.
No, the prudent investor has to follow where Warren Buffett stashed his huge cash pile some years ago, and into safe haven currencies, precious metals and possibly oil and other commodities, although it may be a bit late for commodities given that the down cycle in industrialized economies is gathering force.
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