Tags: jeremy | Siege | Treasury | Bond | Funds | risk

Siegel: Treasury Bond Funds Are Very Risky

By    |   Tuesday, 21 Sep 2010 08:10 AM

While many investors laud Treasuries as the safest investment around, that’s not necessarily the case, says investment guru Jeremy Siegel.

The argument for Treasuries is that you just have to hold to maturity for your full principal and interest payments to be guaranteed by the federal government.

But that’s only true if you own Treasuries themselves rather than shares of mutual funds that invest in Treasuries, notes Siegel, a professor at University of Pennsylvania’s distinguished Wharton School.

“An investor who holds his (Treasury) bonds to maturity will always receive a specified dollar return, quite unlike a stock investor,” Siegel acknowledges on Yahoo.

“But the words ‘hold to maturity’ are critical. Investors are piling into funds that do not hold these bonds until maturity. Funds sell bonds nearing maturity and replace them with similar bonds of longer maturity.”

So if interest rates rise, investors in these funds are looking at permanent losses, Siegel says. And they don’t have to rise much for investors to lose big.

If 10-year Treasury yields rise back to April’s 3.99 percent over the next year, bond holders will lose 9 percent, he says.

Siegel isn’t the only one warning of a decline in Treasuries.

"To embrace buying Treasuries now, you have to believe inflation is permanently impaired and growth will be dismal for an extended period," Tad Rivelle of TCW told The Wall Street Journal.

"Knock the underpinning from either, and it's hard to justify Treasuries at these levels."

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While many investors laud Treasuries as the safest investment around, that s not necessarily the case, says investment guru Jeremy Siegel. The argument for Treasuries is that you just have to hold to maturity for your full principal and interest payments to be guaranteed...
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2010-10-21
Tuesday, 21 Sep 2010 08:10 AM
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