When PIMCO Total Return (symbol PTTAX), the largest bond fund in the world, not only sells, but shorts—or bets against—treasuries, it is as if Moses has descended with tablets and has a frown on his face. True to herd mentality, large bond funds like the Loomis Sayles Bond Fund (LSBDX), and Templeton Global Bond Fund (TGBAX) have liquidated treasuries as well. And just last month, another bond crisis centered around municipal bonds. Faced with pension obligations spiraling out of control and lower tax revenues due to high unemployment rates, every water district, hospital, town, city, and state was going to put up a "going out of business" sign and default on their bonds.
Everyone knows inflation is around the corner, the U.S. is going deeper and deeper into debt, and if you own a bond, it will only go down in value. At some point the U.S. is going to have to "pay the piper." The Tea Party may not prevail upon the government to stop spending ourselves into oblivion.
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If you are getting anxiety just reading these paragraphs, then you understand why the smartest investors in the world don't engage in this conversation.
It has always been a bad idea to bet against America and our ability to prosper even against overwhelming difficulties. America will cut back its spending, innovate, and pay off its debts. We will earn our way out. It's just how we do it. Selling treasuries is a bet against our ingenuity, work ethic, and our breed of capitalism that has made more dramatic changes to the world in the last 100 years than during any other period in human history.
When deciding how to invest, consider this: Actively-managed bond funds are the least likely of any funds to beat their benchmarks. A Standard and Poor's study shows that from 2003 to 2008, only 7 percent of bond funds beat their indices. And while Bill Gross has "rock-star" status, his track record of predictions has been abysmal. Google "Bill Gross New Normal" and you can read about one wrong prediction after another since 2009. Gross cares that PIMCO's assets keep growing because they generate over $12 billion per year in fees. Dire predictions in the media bring in new investors.
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Large bond mutual funds control a miniscule portion of the $14 trillion of U.S. debt. The Federal Reserve holds $1.2 trillion, foreign countries hold nearly $5 trillion, and insurance companies, pension funds, and regular investors also hold their fair share of treasuries. There is no more efficient market than treasuries, and the Fed has the ability to manipulate it—irrespective of Bill Gross's predictions.
But forget the chatter. The critical issue is the function of treasuries in your portfolio, not whether they should be in your portfolio. While treasuries generate income, they don't come close to the returns from owning equities. From 1925 to 2003, treasuries only appreciated 5.4 percent per year or 61 times, while large stocks appreciated nearly 10.4 percent per year, or nearly 3,000 times. The other price you pay for holding bonds is inflation, which is bad for long-term bonds. While bonds increase in value in a deflationary environment when prices are dropping, this is a rare economic circumstance.
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Treasuries protect you against catastrophic events in the world. They are your "go-to-sleep-at-night" funds. They went up in value after 9/11 and during the 2008 financial crisis. That's why you own them. If you listen to Bill Gross and sell your treasuries, you'll regret it the next time the sky starts falling.
The best and simplest way to own treasuries is to buy Vanguard's Total Bond Fund ETF (BND), which is a basket of nearly 5,000 bonds and yields more than 3 percent a year. Worried about inflation? The average duration of all the bonds is only 5 years—only 8 percent of these bonds have durations greater than 20 years, and 25 percent are between one and three years. BND consists of 43 percent treasuries, 28 percent U.S.-guaranteed mortgages, and about 5 percent in foreign bonds. The rest is in investment-grade corporate bonds. For Vanguard to buy, hold, and rebalance, the annual fees are a paltry 0.12 percent.
Next time your heart palpitates as you read that the treasuries you own is a bad idea, consider the source and the function it has in your portfolio.
Mitch Tuchman is CEO and founder of MarketRiders, an online investment advisory and management service helping Americans invest for retirement. MarketRiders gives investors greater peace of mind knowing that they are leveraging the best thinking of Nobel Laureates and the investing methods used by the world's most elite institutions and wealthiest families. MarketRiders is on the investor's side, helping reduce investment costs and risks, and increasing retirement savings.
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Wingnut of MI 8:13AM April 15, 2011