Your Money: This may not be the time to get into Treasuries

Posted: January 16, 2013

If you were lucky or smart enough to buy U.S. Treasuries years ago, when those bonds were yielding high single-digit returns or higher, then there is no reason to sell them now.

However, if you have new money to put to work, should you avoid U.S. Treasuries? Probably.

Short- and longer-term interest rates essentially didn't move in 2012. While there were fluctuations, short-term interest rates remained close to a paltry zero level, with longer-term Treasury bonds yielding just 2.5 percent to 3 percent.

America's fiscal and monetary policy is also less supportive of bond prices, says Columbia Management's Gene Tannuzzo, a senior portfolio manager. The Federal Reserve props up Treasury prices by acting as one of the biggest buyers, and Congress can't agree on how to cut deficits, which means we have to issue more Treasuries to pay for all of our entitlement programs.

In descending order of attractiveness, Tannuzzo likes these bonds instead: bank loans, residential mortgage-backed securities, high-yield corporates, emerging market bonds, and investment-grade corporate bonds, which compensate investors for the assumed risk.

However, sovereign bonds, including U.S. Treasuries and what are known as agencies, such as Fannie Mae and Freddie Mac bonds, "no longer pay investors for the risk they take," he adds.

We asked Ernie Cecilia, chief investment officer at Bryn Mawr Trust, what he would advise a client with, say, $100,000 or more of new money to invest right now.

First off: stocks or bonds? He leans toward equities, since yields on bonds are so low right now. The 10-year U.S. Treasury, for instance, yields just 1.86 percent, which doesn't even keep up with inflation of about 2 percent to 2.5 percent annually.

Despite improving fundamentals, U.S. capital markets should remain volatile, given America's continued structural deficits. However, a slow improvement in our domestic economy and in various global economies should result in a relatively more favorable backdrop for equities. Corporate cash coffers are flush and, Cecilia says, "we continue to see strong dividend growth from well-capitalized franchises."

Domestic stocks, with strong business franchises that can drive earnings growth, plow back retained earnings into their businesses and have attractive valuations, such as T.J. Maxx owner TJX Cos. (symbol: TJX). Cecilia also likes mutual funds such as Lazard International Strategic Equity Portfolio (LISIX), and with developing nations resuming higher growth trajectories, Oppenheimer Developing Markets Fund (ODVIX).

"Given the absolute level of interest rates, we see headwinds in the bond market and below-average returns in 2013," Cecilia adds. Finally, when interest rates do eventually rise, bond prices, which move inversely, will start to drop.

Bad banks

The tiny Swiss bank Wegelin & Co. pleaded guilty this month to conspiring with U.S. taxpayers to evade income taxes. But unlike HSBC, UBS, and other bank giants, three Wegelin officers were charged with criminal offenses.

UBS set up secret accounts for more than 20,000 Americans - hiding more than $20 billion in assets - but paid a fine and kept on doing business. HSBC also just paid a fine without prison terms for officers, after admitting to moving $881 million in laundered drug proceeds for Mexican and Colombian dealers.

Robert Mazur, a former U.S. federal agent who writes about how banks launder billions of dollars, thinks something is fishy about the Department of Justice letting big banks plead guilty to money laundering without anyone going to jail.

Mazur was an undercover agent who infiltrated the Bank of Credit & Commerce (BCCI) as well as Pablo Escobar's Medellin cartel and the Cali cartel. You can read more about big bank money laundering in his book: The Infiltrator: My Secret Life Inside the Dirty Banks Behind Pablo Escobar's Medellin Cartel ( http://the-infiltrator.com).


Contact Erin Arvedlund at 646-797-0759 or erinarvedlund@yahoo.com. Previous columns are www.philly.com/philly/columnists/erin_arvedlund/.

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