There have been a lot of pundits recently talking down the value of owning United States treasury bonds. Let’s examine both sides of this situation and better understand why it is not so easy to dismiss the merits of owning U.S. treasury debt.
The discussion against U.S. bonds revolves around a few issues, including:
- Large supply of bonds
- End of QE2 (the Federal Reserve’s plan for qualitative easing) and no buyers
- Massive U.S. budget deficit
- Inflationary pressures (higher interest rates = lower bond prices)
- S&P’s recent “negative” outlook for United States bonds AAA rating
- Weak U.S. dollar
Here are some of the reasons to support owning U.S. treasury bonds:
- Continued unrest in Middle East and North Africa
- Flight to safety/quality
- U.S. Treasury bond market is unmatched in depth and liquidity (easy to buy and sell in massive quantities)
- U.S. economy on the mend and GDP growth better than many of the other G-7 nations
It is not an easy decision to know what amount of U.S. treasury debt one should hold in their portfolios; however, it is important to remember that diversification can be your friend. Despite the pros and cons of owning U.S. sovereign debt, it is not an “all or nothing” proposition. Therefore, even within the fixed income allocation for our clients’ portfolios, we own many other types of bonds to make sure that the bond portion of the investments is well diversified.