Tags: Government | Data | Bond | Losses

Government Data Predict Big Bond Losses

By    |   Wednesday, 22 February 2012 09:12 AM

Yields on the 10-year Treasury note are at about 2 percent. According to the Treasury Department, that is almost guaranteed to deliver a loss of about 0.2 percent a year to investors.

The real interest rate is calculated by the government every day and compares interest rates to inflation expectations. The 10-year rate tuned negative last fall, after Treasurys delivered most of their gains for the year.

The Congressional Budget Office projects even steeper losses during the next five years.

Official budget projections show the interest rate reaching 4.1 percent, doubling from recent levels. Assuming they are correct, investors will lose more than 15 percent of their principal.

Turning all these data points into dollars shows that bond holders face real risks. Current interest rates aren’t keeping up with inflation. A year’s worth of interest on a $1,000 10-year note would buy about 5.7 gallons of gas today. If gas goes up in line with expected inflation, you’ll only be able to buy about 5.5 gallons next year and even less in future years.

In five years, the bond you paid $1,000 could be worth less than $850.

Inflation fears would lead to larger losses.

The CBO actually projects that inflation will hold steady even as the interest rate increases. Usually these two rates move together and the CBO doesn’t explain why they think this time will be different.

Stocks are risky, and so is real estate or any other investment. But they offer the chance of gains in the future. Treasury securities offer little chance of gain and investors face almost certain losses in this market.

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Wednesday, 22 February 2012 09:12 AM
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