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Government Bonds and Inflation Rate
Old 01-16-2012, 06:47 PM   #1
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Government Bonds and Inflation Rate

I thought these 2 paragraphs lifted from WSJ were very interesting. I was born in the 60's so my reference point on bonds has really only been the past 3 decades, which obviously is not a great historical reference point. When people say bonds cant stay this low for long, and I was one of those, that may not be true. The government has kept them below inflation rate for a long period before in the past. Not making an investment comment here, just thought it was interesting.

For investors who merely want to buy bonds and hold them to maturity, to collect the interest, the bigger risk is that interest rates remain below the rate of inflation, thus eroding returns. Already, with inflation clocking in at 3.4% in November, the latest data available, investors who buy 10-year Treasurys today and hold them to maturity would lose about 1.5% annually.

Treasury yields can stay below the inflation rate for long periods. From 1942 through 1951, the U.S. Treasury Department essentially forced the Federal Reserve to keep 10-year interest rates below 3%, as the country sought to pay off massive debt accumulated during World War II. Investors during the period would have lost 4.5% annually after inflation by investing in a portfolio of Treasurys with an average maturity of five years, according to Morningstar data.
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Old 01-16-2012, 07:54 PM   #2
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Originally Posted by Mulligan
For investors who merely want to buy bonds and hold them to maturity, to collect the interest, the bigger risk is that interest rates remain below the rate of inflation, thus eroding returns. Already, with inflation clocking in at 3.4% in November, the latest data available, investors who buy 10-year Treasurys today and hold them to maturity would lose about 1.5% annually.
Asset allocation helps here. I know that I do not know what the future holds, so bonds are just part of my portfolio. (45% fixed, including bonds and a small cash reserve for current year use.) I also hold stock mutual funds, which should provide the opportunity for dividend income and capital gains now and then.

Bonds alone are in my opinion insufficient for a long term portfolio.
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