Fisher Investments Editorial Staff
Alternative Investments, Interest Rates, US Economy

Bonds in Red

By, 01/05/2010
Story Highlights:
  • US Treasuries are generally seen as safe investments, but bonds lose value too—like in 2009.
  • The US government's heavy borrowing, along with weakening demand for US debt toward year end, pushed Treasury prices down nearly 3.6% on average in 2009.
  • Looking ahead, US Treasuries face conditions that could continue to favor falling prices and increasing yields.  


Globally, US Treasuries are about the "safest" investment going. We say "safe" because it depends on your definition of safe. Will you get your initial investment back plus coupon payments? Heck yes—your investment is backed by the full faith and credit of the US of A. And while fixed income can play an important role in long-term strategies for some investors, many mistakenly assume investing in bonds is risk-free because historically they're less volatile in the near term than stocks. Make no mistake, bonds can and do lose value too—even über-safe US Treasuries.

The US sold record amounts of Treasury securities in 2009 to finance, among other things, economic stimulus in response to the global recession. The heavy auctioning of Treasuries, combined with investors seeking higher yields elsewhere pushed Treasury prices down nearly 3.6% on average in 2009 (the worst annual performance since 1978) and caused December yields to sharply rise. UK and Canadian government securities also ended 2009 in the red, returning -1.2% and -1.6%, respectively, while Japan and German bonds posted small gains of 0.9% and 1.8%, respectively.  

In all, not a great year on an absolute basis. But opportunity cost was the real risk in 2009—Treasuries have never underperformed stocks as much as they did in 2009. Further, returns on US government debt were also poor when compared to US corporate bonds. Investment-grade corporate bonds rose 18.7% while high-risk, high-yield (i.e., "junk") corporate bonds returned 58.2% for the year. Even assets shunned by investors during the financial panic posted gains—mortgage-backed securities returned 5.9% and municipal bonds returned 12.9%.

Certainly, though interest rates can remain where they are for a while (i.e., prices wouldn't move much), there is still a risk prices could continue falling. The US government will likely continue to sell large quantities of Treasuries to finance an unprecedented public debt swollen by fiscal stimulus. If demand for Treasuries, which has been historically strong in the wake of the global financial crisis, falls a bit, prices will fall too and yields rise. The US Fed will likely wrap up some emergency monetary stimulus and quantitative easing programs, which would elevate the supply of Treasuries and possibly further push prices down and yields up. Returning investor confidence and appetite for risk could also weaken demand for safe, but less profitable, US government debt. Money could flow out of Treasuries and into stocks, corporate bonds, and other riskier investments.  

However, these same conditions could boost stock markets. Additionally, the continued dour economic outlook, along with improving economic fundamentals beating expectations, should continue fueling the equity bull market that started in Spring 2009.


*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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