Any Reason for Short-Term Bonds Through Treasury Direct?

[emilylynn]

As I've said before, bonds totally elude me. So I took it pretty much on faith when I was advised to keep a stash of 13-week T-bills in an account with Treasury Direct. Well, for the entire time I've had these things, they've been rolling over at somewhere between 3 and 4 percent--basically a negative return. And, unlike my short-term bond fund, I get no increase in NAV to offset what seems to be a perpetual decline in yield.

Is there any good reason to hold individual short-term bonds?

On a side note, could anyone help me to understand why are rates on short-term treasuries are remaining so low? I would think that the specter of additional rate cuts (and the resulting expectation of rising inflation), combined with the threat of international diversification of currency reserves, would be putting an upward pressure on short-term treasury yields. Has the "flight to safety" been so strong that it has overcome these factors?

Thanks in advance for your insights!

[danm]

You're buying bills, not bonds, of course you won't see any NAV increase - that's the point! If you want some capital gain or loss action buy bonds. If you had bought a 30 year bond last summer at 5%, you would now be enjoying about 2.5% in interest, and 10-12% capital gains for say 14% total gain, 30% gain annualized. Naturally there's higher risk.

Otherwise, why would rate cuts cause treasury yields to go up? Quite the opposite. Besides recessions are deflationary events, and that's quickly becoming the consensus.

As for giving you a negative return, cash outperformed the S&P last year, and bonds significantly beat them (8% for medium term and 15%ish for longer term). It all depends on how you look at it...

[LOL!]

The reason treasury yields went DOWN is because of the flight to quality (i.e. treasuries) when the news of some fixed_income funds holding subprime assets surfaced. More folks wanted the safety of treasuries, so they bid up the NAV and the yields went down. If you graph these two bond funds over the last year VFSTX and FUSFX, can tell me which fund has exposure to subpriime?

Something similar happened with TIPS. The spector of higher inflation and performance chasing caused TIPS to have total return of about 11-13% of the last year. I can't see that happening in the next year.

So corporate and long term bonds have been left in the dust in 2007.