Should You Own Government Bonds?
April 19, 2011
SAN DIEGO (ETFguide.com) – I once had a family relative who was a big believer in U.S. government bonds. It was his opinion that government bonds were always a safer bet relative to other assets. And for that reason, he believed in an all Treasury bond portfolio. Unfortunately, my relative is no longer alive but if he were, I wonder if he would agree that lending money to today’s U.S. government is a ‘safe bet.”
Given the U.S. government’s deteriorating financial situation, is it wise to own government bonds (NYSEArca: TLT)?
Standard & Poor’s said there’s a one-in-three chance they’ll downgrade the U.S. government’s credit score within the next two years. While a number of people were pleased with that assessment I wasn't. It's the most wishy-washy credit opinion I've ever seen - and that's saying something because looking into a bowl of alphabet soup has sometimes revealed more about credit-worthiness than credit raters.
S&P also cited a “material risk” that the U.S.’ political leaders could fail to gain control of the country’s soaring debt and budget deficits if they don’t agree on a few agreements. Is anybody in D.C. paying attention to this? Good, we didn’t think so.
Lastly, S&P is forecasting that national debt will rise to 84% of gross domestic product by 2013.
Now that credit raters have finally, ever so hesitantly, joined the alarm squad – here’s another alarm: today’s credit ratings still don’t reflect the true credit risk of lending your money to D.C.’s financial drunkards.
Bill Gross, manager of the Pimco Total Return Fund (Nasdaq: PTTAX) has been one of today’s most vocal critics of U.S. government bonds.
In a shot at the traditional view that investment portfolios should always have exposure to government debt, Gross said, “Old-fashioned gilts and Treasury bonds may need to be ‘exorcised’ from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint.”
Gross explains that free handouts have gotten the government into a fine mess.
“To rebalance debt loads and re-equitize financial institutions that should have known better, central banks and policymakers are taking money from one class of asset holders and giving it to another. A low or negative real interest rate for an ‘extended period of time’ is the most devilish of all policy tools,” said Gross in written piece titled “Devil’s Bargain.”
Although low interest rates have bought the U.S. government time to get its financial house in order, there’s no guarantee rates will stay in check or that even the Federal Reserve, in all its power, will be able to keep rates indefinitely low.
There are a number of ETFs that follow U.S. government bonds like the the iShares Barclays 1-3 YR Treasury Bond Fund (NYSEArca: SHY), iShares Barclays 3-7 YR Treasury Bond Fund (NYSEArca: IEI), iShares Barclays 7-10 YR Treasury Bond Fund (NYSEArca: IEF) and iShares 10-20 YR Treasury Bond Fund (NYSEArca: TLH). Which should you own?
ETFguide’s May newsletter along with its weekly ETF Picks spell out specific actionable strategies for investing with the government’s debt crisis in view. The theory that government bonds should always be included in a diversified portfolio is about to get tested.