Marc Cuniberti: A place to hide
Although stocks and bonds have a tendency to move opposite of each other, often when stocks continually slide for days or weeks on end, bonds can also give way to lower prices. Simply put, the correlation to bonds and stocks seems to hold up well at the onset of market routs, but in severe and prolonged downturns, bonds can experience contagion and fall in concert, bucking the usual trend.
Since investors may hold a variety of stocks and bonds in their portfolio, as is recommended by many an advisor and is an accepted practice to provide some stability to portfolio balances, when bonds start to slide, where can an investor hide short of moving to cash or money market funds?
U.S. Treasuries are debt from the U.S. government and come in a variety of maturity dates ranging from a few months to many years. They can be called Treasury Bills, Bond or Notes depending on how long to maturity. They are what is called government-issued fixed income securities that are guaranteed by the U.S. Government and therefore deemed safe and secure. The common practice for monetary debt of any kind is for the borrower to pay some sort of compensation to the lender for the privilege of borrowing the money. Called maturity, how long an IOU is written for will generally reflect how much a lender will make for entering into the lending agreement.
Interest payments, which can be the compensatory method, usually increase the longer the money is borrowed.
Buy a one year U.S. Treasury and it will likely pay less than if you buy a ten year treasury. It is not always the case that a longer maturity results in a higher yield, and when a longer maturity pays less than a shorter maturity day, it is called an Inverted Yield curve, but that is a story for another day.
In any case, investors getting slammed by both stocks and bonds could purchase Treasuries for at least some sort of yield which would be better than zero if just sitting in cash.
Although paying only a few percentage points, one year treasuries may pay more that CDs and savings accounts. They don’t actually pay you interest, per se. Instead you buy them under par (stated value) and then when they mature, you get the full value of the Treasury.
An example would be an investor buys a one year bill with a maturity of June 2023 with a face value of $1,000.
He buys it in June of 2022 and has to wait a year since the Treasury has a one year maturity coming due in June of 2023. He might pay only $950 for the bill but when it matures, he gets the full $1,000. (Example is for illustration only).
Longer treasuries called bonds or notes pay a periodic interest payment instead of utilizing a discounted buy price.
Although treasuries, like all debt, has a maturity date when bought, the treasury market is always liquid, meaning an investor can bail out early if need be for whatever reason. Selling a debt instrument like a treasury before its maturity date, however, may mean the final sell price may be less or greater than the stated pay off amount. This can happen when interest rates move in the general economy which is affected by the overnight rate set by the Federal Reserve.
Treasuries may also be exempt from State and Local taxes, making their minimal yields a bit more attractive. It may sound a bit convoluted to some, but it’s actually quite simple and any banker, investment advisor or brokerage house should be able to explain it to you in short order.
Treasuries can be regarded as a hiding place during times of market duress yet still pay the investor at least some income. Be aware that the longer maturity one selects, the longer you will have to hold it without being subject to a possible revaluation of the payoff amount. This revaluation can happen when interest rates move which can happen on a daily basis. In general, you should be aware the longer the maturity you select, the more the revaluation amount will be when interest rates move up or down.
“Watching the markets so you don’t have to.”
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, SDSU, and California Insurance License #0L34249. His website is moneymanagementradio.com, and was recently voted Best Financial Advisor in Nevada County. 530-559-1214
Seems like most of my latest articles have been about inflation, the Federal Reserve (the FED) and their interest rate increases, and the crazy action in the stock markets.
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