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Market Pulse: A warning shot

David Vomund

In early 2012 I wrote a headline-catching article, “U.S. Treasurys — a high-risk investment.” I wrote that holding Treasuries would guarantee an after-inflation loss (it did) and that Treasury fund investors would see large losses when (not if) interest rates rise. Although rates should remain low for some time, recent activity shows just how vulnerable investors are to rising interest rates.

The iShares Barclays 20+ Year Treasury ETF (TLT) lost 7 percent in May and is down 13 percent from its July high. Many active fixed-income managers didn’t fare much better. Pimco’s Total Return Fund (PTTAX) fell 2.4 percent in May, its worst monthly loss since September 2008. Why the decline?

Investors are beginning to speculate on when the Federal Reserve will taper its bond-buying program, which has artificially kept interest rates low. Also, recent economic reports point to a resilient economy, especially when compared to developed nations.

What is a fixed-income investor to do? My January 23 article, “Profiting From a Rising Rate Environment” provides the framework (I’ve placed a link to the article on my blog). In the article I make a case for “outside the box” securities whose yield adjusts with interest rates.

Instead of falling, the Goldman Sachs Series D adjustable preferred I recommended is up 10 percent since the article was published. Perhaps a better value is the HSBC-USA Adjustable Rate Series D. This investment grade security yields 4.4 percent and its dividend is tied to the highest-yieldingTreasury.

My client portfolios are heavily weighted to adjustable- rate securities … and with good reason. Interest rates are far more likely to rise than fall.

It will be years before the Fed actually raises rates and I don’t expect bond prices to plunge anytime soon, but recent activity provided yet another warning shot for Treasury investors. Their “safe” securities are anything but.

David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.


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