Mario Iacone: TREAURY BONDS WILL STOP THE SLIDE

From Mario Iacone, October 1, 2009

Received the following comment with respect to the Treasury Bond Post.

“you did not indicate the decline in market value (depreciation) of the Treasury bond in your rise in interest rates to 6% example. Your readers probably need to know the market value of Treasury bonds can go both up and down”

I wish to clarify and elaborate.

A long term commitment was assumed although they can be traded short term to enhance the overall yield and take substantial profits.

Such would require building a ladder of bonds with additional purchases as rates go up. Assume a purchase at the rate of 4.5%.

Further assume that interest rates would begin to rise and continue to rise. For the sake of example, let’s assume rates rise to 6%.

One method of building a long term commitment would be to add to your bond purchases in equal amounts as rates rise. Purchase at 5%, 5.5%, and 6%.

Bear in mind, that the value of the original purchase at 4.5% has gone down because interest rates have gone up. But, with a long term approach, it would not be necessary to sell at a loss. The worst case scenario would be that you hold the bond until maturity when you will receive your original investment amount and received a return of 4.5% until that maturity date.

However, Treasury Bond rates have cycled on an average of 12 years. Remember, interest rates rose to 6%. When they come back down, say 4%, the value of that 4.5% bond will appreciate above your original purchase price. Should you choose to sell, a profit will be made on your original purchase price in addition to the 4.5% return while you held it.

Meanwhile, when the interest rate falls to 4%, the purchases made at 5%, 5.5%, and 6% would have gone up significantly in value because their interest rates are higher than the current rate of 4%.

WHAT’S MY POINT?

A consistent long term approach to Treasury Bonds can produce lucrative returns.

AND,

TREASURY BONDS NOT ONLY FUNCTION AS A SAFETY FACTOR, to STABILIZE ASSET ALLOCATION, but will also provide good returns and appreciate to OFFSET LOSSES in RISK EQUITIES!