Yield of Dreams

Is It Time to Get Back Into Treasuries?

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Despite Standard & Poor’s downgrade of the U.S. economy in the summer of 2011, investors flooded into U.S. Treasuries, viewing Treasuries as the only game in town for safety. Over the last year, many have questioned whether we could be headed for a Treasury bubble, and since then, flows to Treasuries have tapered off.

But could now be the time to get back in? Jeremy Radcliffe, co-founder and managing director of Salient Partners, believes so. During an alternative investments roundtable last week, Radcliffe told journalists that his firm now has a higher allocation to Treasuries because of their protection in a deflationary environment.

“I think Treasuries are one of the most misunderstood asset classes in the world,” Radcliffe said. “Everybody talks about their very low yields, and the fact that Treasuries are going to get killed when rates go up. That’s not really understanding what the purpose of Treasuries in a portfolio are and the way you make money in Treasuries. You’re going to make a lot more money in Treasuries than the stated yield on a 10-year bond if inflation does not come in where it’s projected to.”

There is a widely held view that Treasuries are the worst investment right now because of their low yields. Flows to government bond funds haven’t been too high this year. According to Morningstar, long government bond ETFs only took in $23 million year to date through November, while short government bond ETFs saw net outflows of $2.4 billion over that period.

Could retail investors be getting it wrong again? We still have a lot of debt on the books, and that will be a drag on future growth, Radcliffe said. And in a deleveraging cycle, the environment is inherently deflationary, he said. And in a deflationary environment, you need a defensive investment in your portfolio, and that’s where Treasuries and government bonds come in, he added.

“It is extremely difficult to see inflation being a real problem in, forget about next year, I’m talking the next five years,” he said.

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