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Do you think US treasuries are still safe?
Old 06-07-2011, 10:05 PM   #1
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Do you think US treasuries are still safe?

Hi Everybody...

I would appreciate some input and opinions re: what we have in our Roth IRA accounts, which is a substantial portion of the total portfolio (40%)

Hers: Vanguard TIPS fund only
His: Vanguard Intermediate treasury fund only

I have safety concerns about treasuries because of the ballooning deficit. Maybe it's just me, but I have concerns about the economy as a whole

What do you think? How do you address the issue of diversification within your non-taxable accounts?
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Old 06-07-2011, 10:36 PM   #2
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Safe as in what? They are safe from default, if that happens you have a lot more to worry about than that! They carry interest rate risk but that's par for the course. Is the other 60% in equity funds? If so then that's a reasonable allocation tho a bit high on equities if retired for my tastes. YMMV.
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Old 06-07-2011, 10:47 PM   #3
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If you plan to hold them for 30 yrs (I suspect not) you'll probably get paid back at the end of the term. Of course the $1000 face value might buy you a cup of coffee by then. Not good.

If you want to be able to sell them sometime before term, realize that any bond will lose value as interest rates go up. Which is the only direction they CAN go, since the Fed is currently holding short-term rates around zero.

Current 30-yr Treasuries return about 3.5%, or $35/yr on a $1000 bond. Now imagine rates go up just to 6%. (They were over 6% as recently as 1997, and over 12% in 1982.) A bond buyer has the choice of buying a new Treasury bond that yields 6% of $1000 or $60, or yours that yields 3.5% of $1000 or $35. He's not going to buy yours at face value. The value of your bond will fall until 3.5% of the original face value represents 6% of the new price. $35 is 6% of $583.33, so the buyer will only pay you $583 for your $1000 bond. Also not good.

I would not touch Treasuries myself.
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Old 06-07-2011, 11:36 PM   #4
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I think the OP is referring to the possibility of a a U.S. government default as debt continues to grow. The prospect is highly unlikely but possible.
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Old 06-08-2011, 12:00 AM   #5
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Do you think US treasuries are still safe?
"Safe" compared to what?

The idea behind a guaranteed risk-free debt is that Congress is guaranteed to be able to raise taxes enough to pay it off. The other side of that is if a Treasury fails... then you have more important problems to worry about, like finding enough gold bullion to buy your shotgun ammunition and corn seed.

During the Great Recession, I was surprised the worldwide demand for $100 bills. Everyone affected by any economic upheaval was getting rid of their currency for American dollars. So apparently we Americans have the lowest opinion of our paper.

I suppose you could buy gold bullion instead of U.S. Treasuries, but bullion's carrying expense is a lot higher-- unless you bury it in your bomb shelter.
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Old 06-08-2011, 12:21 AM   #6
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If the concern is default risk then IMHO, you need not be worried - the Fed can continue printing as much money as needed.

If the concern is the risk that inflation will erode the real value of your investment, then investing in assets which either purport to track some inflation (e.g. TIPS) or which do not have fixed nominal returns (e.g. equities, real estate) has the potential to address the issue. Neither will guarantee that your investments will hold their real value.

If the concern is missing out on the benefits of rising interest rates, then a ladder of directly owned bonds with a spread of maturity dates may work.

Given that (i) there is no such thing as a risk free investment (ii) the future is not capable of being predicted with any degree of reliable accuracy, it's difficult to get away from the fact that you will face some kind of risk whatever you do.
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Old 06-08-2011, 12:46 AM   #7
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Repeat after me: The US government WILL NOT default on its debts. End of story. Anything else is pure fantasy. Our debt is denominated in our own currency so all we have to do is print more money. It truly is as simple as that.

Now what the US government WILL DO is pay you back with dollars that most likely WILL NOT maintain purchasing power parity or better, especially with long dated debentures.

TIPS are a more complicated issue, but have the best chance in the current enviroment (i.e. better than any other securitiy other than Ibonds) of staying ahead of inflation.
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Old 06-08-2011, 12:57 AM   #8
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Now what the US government WILL DO is pay you back with dollars that most likely WILL NOT maintain purchasing power parity or better, especially with long dated debentures.
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Old 06-08-2011, 04:07 AM   #9
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Most experts recommend some form of diversification across asset classes (i.e., don't put all eggs in one basket).

There are many risks that can deteriorate your balance sheet besides default.
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Old 06-08-2011, 05:14 AM   #10
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Repeat after me: The US government WILL NOT default on its debts. End of story. Anything else is pure fantasy. Our debt is denominated in our own currency so all we have to do is print more money. It truly is as simple as that.

Now what the US government WILL DO is pay you back with dollars that most likely WILL NOT maintain purchasing power parity or better, especially with long dated debentures.

TIPS are a more complicated issue, but have the best chance in the current enviroment (i.e. better than any other securitiy other than Ibonds) of staying ahead of inflation.
I won't be quite so cocky. Historically most countries have defaulted on their debt at least once. Either by "restructuring" like we are seeing in Greece e.g 5 years Greek bonds are now 12 year bonds, interest rate, putting restrictions on being able take capital out like Iceland, or sometimes switching to a new currency. The US, Canada, Australia and roughly 50 other countries are the exception not the rule for never defaulting on sovereign debt. I am also counting hyperinflation as being a form of default.

Certainly somebody who holds a T Bill or bond that matures in the next month has zero risk. After Aug. 2 it will be interesting to see if the Treasury pays off bond holders, government workers, or suppliers first. In the long term, there is no law that says the US has to be the world reserve currency, the pound, the guilder, and Spanish dollar (pieces of 8) all formerly held that role but they no longer do.
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Old 06-08-2011, 06:38 AM   #11
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Repeat after me: The US government WILL NOT default on its debts. End of story. Anything else is pure fantasy. Our debt is denominated in our own currency so all we have to do is print more money. It truly is as simple as that.
Is it? Does anyone know where we can view the legal framework under which the Fed expands the money supply? Are there limits? Does the debt ceiling effect how much money the Fed can put into circulation? I have read other pundits saying that if the debt ceiling is raised, the Fed will "print" money. You say if it is not raised, they can "print" money. But, if the US needs to pay interest to foreigners to avoid default and needs more "money" to do so don't they have to "borrow" it from the Fed? If so, sure the Fed can expand the money supply to enable this -- but only if the debt ceiling is raised to allow that. If the later is not true, how does the Fed do it?

I would simply like to know how this actually works.
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Old 06-08-2011, 07:18 AM   #12
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I think the OP is referring to the possibility of a a U.S. government default as debt continues to grow. The prospect is highly unlikely but possible.
And if the unlikely happened, diversification won't mean squat.
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Old 06-08-2011, 07:29 AM   #13
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For the U.S. default is a political decision, not an economic eventuality. Normally I'd say the probability of a federal default, considering that 100% of our debt is denominated in our own currency and that our federal spending (while high by US historic standards) is quite low compared to that of other developed countries, is close to zero. But lately we've seen a rise of crazy people getting elected to higher office who argue that default wouldn't be a bad thing. If crazy increasingly passes for good judgement, all bets are off.
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Old 06-08-2011, 08:12 AM   #14
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But lately we've seen a rise of crazy people getting elected to higher office...
I'd argue the US has a long history of elected officials who manifest this behavior. The only difference today is we are much better informed due to the diligence of the fourth estate.
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Old 06-08-2011, 08:42 AM   #15
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I'd argue the US has a long history of elected officials who manifest this behavior. The only difference today is we are much better informed due to the diligence of the fourth estate.
To give one example the Indiana legislature decided that having Pi be 3.14159... was just to complex and considered a law declaring it to be 3.00.

(The house passed it but the bill died in the senate). Of course then we had prohibition which was a smash flop.
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Old 06-08-2011, 08:47 AM   #16
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Safe as in what? They are safe from default, if that happens you have a lot more to worry about than that! They carry interest rate risk but that's par for the course. Is the other 60% in equity funds? If so then that's a reasonable allocation tho a bit high on equities if retired for my tastes. YMMV.
Thanks, Veremchuka. I am considering diversifying into either Total Bond Fund, or an investment grade corporate bond fund.

The other 60% includes cash, gold, and stocks (Total Stock Market Index & FTSE All-world ex US).
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Old 06-08-2011, 08:49 AM   #17
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If you plan to hold them for 30 yrs (I suspect not) you'll probably get paid back at the end of the term. Of course the $1000 face value might buy you a cup of coffee by then. Not good.

If you want to be able to sell them sometime before term, realize that any bond will lose value as interest rates go up. Which is the only direction they CAN go, since the Fed is currently holding short-term rates around zero.

Current 30-yr Treasuries return about 3.5%, or $35/yr on a $1000 bond. Now imagine rates go up just to 6%. (They were over 6% as recently as 1997, and over 12% in 1982.) A bond buyer has the choice of buying a new Treasury bond that yields 6% of $1000 or $60, or yours that yields 3.5% of $1000 or $35. He's not going to buy yours at face value. The value of your bond will fall until 3.5% of the original face value represents 6% of the new price. $35 is 6% of $583.33, so the buyer will only pay you $583 for your $1000 bond. Also not good.

I would not touch Treasuries myself.
What would you have in your non-taxable accounts?
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Old 06-08-2011, 08:55 AM   #18
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"Safe" compared to what?
...suppose you could buy gold bullion instead of U.S. Treasuries, but bullion's carrying expense is a lot higher-- unless you bury it in your bomb shelter.
That's what I am wondering about...the "what."
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Old 06-08-2011, 09:08 AM   #19
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For the U.S. default is a political decision, not an economic eventuality. Normally I'd say the probability of a federal default, considering that 100% of our debt is denominated in our own currency and that our federal spending (while high by US historic standards) is quite low compared to that of other developed countries, is close to zero. But lately we've seen a rise of crazy people getting elected to higher office who argue that default wouldn't be a bad thing. If crazy increasingly passes for good judgement, all bets are off.
I just don't know...I have opinions re: politicians, but I'm wanting to cut through all the BS, and have a "just the facts ma'am" approach. I need to leave the emotion out of my investing choices.
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Old 06-08-2011, 09:13 AM   #20
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Seriously, define "safe". Safe from default? There's no 100% sure thing, but Treasuries are about as close as they come, and if they defaulted, return of invested capital might be low on the list of things to worry about. With the virtually unlimited power to tax and print money I see hyperinflation and a tanking of the dollar long before I see defaults on Treasuries. And even that's not a given.
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