Tags: Morningstar | risky | Treasurys | erase

Morningstar’s Jacobson: Treasurys Are Risky Business Right Now

By    |   Friday, 13 April 2012 07:57 AM

Treasurys don’t look so hot right now, says Eric Jacobson, director of fixed-income research for Morningstar. That’s because inflation erases Treasurys’ interest payments, he says.

To figure out inflation expectations, you can subtract the real yield of Treasury Inflation-Protected Securities (TIPS) from nominal Treasury yields, Jacobson writes on Morningstar.com.

Treasury 10-year notes now yield 2.06 percent, while 10-year TIPS have a real yield of negative 0.27 percent. That produces an inflation expectation of 2.33 percent over 10 years.

Editor's Note: Wall Street Insider: The System Is Rigged

And if that expectation turns out to be correct, investors in 10-year Treasurys would experience a negative income stream over the life of the note. That’s not an attractive investment.

So it’s no wonder that most bond fund managers are shying away from Treasurys, Jacobson says.
Those managers tell Morningstar that they too expect inflation of 2 to 3 percent.

“It's one thing to grudgingly accept a real yield of 1 percent when you think it should really be 1.5 percent or 2 percent,” Jacobson writes.

“It's wholly another to accept a yield that you feel pretty certain is going to evaporate (in terms of purchasing power) over the life of the bond you're considering.”

Pimco’s star bond fund manager Bill Gross is one of those who’s wary of Treasurys.

He cut them for the second straight month in March -- to 32 percent of Pimco Total Return Fund’s holdings. Meanwhile, he lifted the fund’s mortgage-backed securities allocation to 53 percent.

Editor's Note: Wall Street Insider: The System Is Rigged

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