September 12, 2019
You had to be completely off the grid in to miss the news that the “yield curve” had inverted. I know many of you weren’t able to escape all the chatter about how troubling this could be. I received many emails full of worry.
You can check out my August 18th podcast for a full explanation of what is going on.
The bottom line is that the interest rates that bonds pay have been falling sharply in 2019 in response to concerns that the U.S., and other major economies, are slowing to the point that a recession could be on the way in the next year or so. The inverted yield curve is a rare event when the interest you can earn on a short-term bond pays more than a yield on a long-term bond. And when that happens it tends to foretell a recession.
The bigger picture I want to talk about is that all bond yields are low today. Last Fall if you bought a 10-year Treasury Note you locked in an annual interest rate for the 10 years that was above 3%. Buy a 10-year Treasury Note today and it will pay you less than 2%. In late August, the yield –another name for the interest you are promised – was 1.7%.
I know for retirees and those of you who like the safety of bonds, that watching yields fall back to levels we haven’t seen since the financial crisis, is frustrating. And challenging.
But I don’t want you to give up on Treasuries. The reason you own bonds isn’t just for the interest payout. It’s for the safety that bonds provide when the economy—and your stock portfolio—are hurting.
And Treasuries are like no other bond. The U.S. government has always, always, always made payments on its bonds. On time. I want you to know that Treasuries are such a rock-solid safe bet that foreign governments own a lot of our Treasury bonds. That tells you a lot. When other government want a safe place to put their money, they buy U.S. Treasuries!
High-quality corporate bonds and high-quality municipal bonds can have a place in your bond portfolio, but please understand they are not as “safe” as Treasuries. That doesn’t make them bad! But when rough times hit, nothing beats Treasuries.
During the last bear market that ended in March 2009, the S&P 500 stock market index fell more than 50%. All bonds did better, but to varying degrees. High quality corporate bonds lost 6%, an index of high-quality municipal bonds rose 2.4%. And an index of U.S. Treasuries gained more than 15%.
That’s why you own Treasuries my friends. In times of stress, they stand tall.
Credit & Debt, Saving, Investing, Retirement