Long Term Treasuries Weaken

Investors who fled to the safety of long term treasuries at the beginning of the year have to be second guessing themselves.

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Since January 2, the Barclays Capital 20+ Year Treasury Bond Fund (TLT) is down 22%.  That compares to a flat return for stocks with theSPDR S&P 500 ETF (SPY) up a little over 2% on the year.

Long term treasuries are under pressure due to the threat of inflation that could come from the Obama administration’s massive budget deficits and the Fed’s aggressive approach to flooding the economy with dollars.  To quote Jeremy Siegel (see more below):

“Since the credit crisis began, the Federal Reserve has more than doubled the supply of its own money, and government deficits are running into the trillions of dollars. Many believe this will inevitably lead to rapid inflation.”

Bond values are hurt by rising prices that result in weakened purchasing power that eats into the value of the bond’s interest and principal payouts over time.

If the Fed tightens interest rates and the government begins to reign in spending, the value of long term treasuries could be maintained or even turned around.  That’s the view of Jeremy Siegel, the noted Wharton economist, in his recent opinion piece Inflation, Not Default, Is Risk for Treasury Bonds.

Investors seeking the safety of government bonds while protecting against inflation worries should consider inflation-protected securities or TIPS.

For more, see the ETF Directory for a complete listing of Fixed Income TIPS ETFs