U.S. Treasury bonds rallied in 2011, as a number of macroeconomic woes, including the European debt crisis, incited worries of a global market meltdown. Does that mean you should consider investing in them?
Yes, U.S. Treasuries are appealing. A portfolio of U.S. Treasuries with an average maturity of 20 years rose 28% in 2011, even better than its 26% jump in 2008, when we were in the midst of a financial crisis. The government securities haven’t seen a better year since 1995, according to Morningstar.
That doesn’t mean U.S. Treasuries are a sure thing. No investment is.
The U.S. Treasury rally could wind down at any moment. In order to match the 2011 price rally, the 10-year U.S. Treasury yield would have to drop to about 1.05%, far below its record low of 1.72% in September 2011.
Additionally, there are other high-yielding alternatives. For example, you may be able to obtain higher yields with only slightly more volatility via non-Treasury government-backed bonds such as those issued by agencies or supported by agency mortgage-backed securities.
One example is mortgage-backed securities supported by the Government National Mortgage Association, which guarantees investments backed by federally insured loans.
These securities carry the full faith and credit of the U.S. government and may offer a higher yield than comparable U.S. Treasuries.
Another example is a bond from less-well-known government agencies such as the Federal Farm Credit, the Tennessee Valley Authority and the Federal Judiciary Office Building Trust. As of mid-January, these 10-year bonds yielded about 2.6%, 0.6 percentage points more than the equivalent U.S. Treasury, according to The Wall Street Journal.
Of course, no investment is necessarily suitable for all investors. Contact your financial advisor for help in determining if the securities mentioned here are appropriate for your portfolio.