August 9, 2011

Top 5 Reasons Why U.S. Bonds Are Still a Good Bet

Neuberger Berman’s fixed-income team says U.S. Treasuries shine in light of global woes

Traders work on the floor of the New York Stock Exchange. (Photo: AP) Traders work on the floor of the New York Stock Exchange. (Photo: AP)

The United States’ reputation for backing U.S. debt with a “full faith and credit” guarantee was tarnished late Friday when Standard & Poor’s lowered the nation’s long-term credit rating one notch to AA+ from AAA. And certainly, markets tumbled Monday as investors worried about the government’s ability to revive the stalled economy.

But amid the frantic selling, a beneficiary of the negative market sentiment was the very same asset class that caused the selloff in the first place: U.S. Treasuries. Yes, despite S&P’s downgrade of U.S. debt, investors rushed Monday into the safest haven they know, and 10-year Treasury note yields fell to 2.32% from 2.56% as prices—and demand—rose. Meanwhile, two-year Treasury notes hit record lows, yielding 0.26%.

Those numbers alone are proof that U.S. Treasuries are still a sound investment. But for those looking for more evidence that the United States’ unconditional guarantee on its interest and principal remains intact, here are the top five reasons why U.S. notes and bonds are still a good bet:

5) We Already Know What We Know.

The markets have been anticipating an S&P ratings action for months, so the news on Friday didn’t surprise savvy market players, who don’t expect a long-term negative outcome due to the downgrade. Says the fund company Neuberger Berman’s fixed-income team, which published a U.S. debt downgrade comment on Monday: “The historic downgrading of U.S. debt by Standard & Poor’s is likely to create short-term market volatility and cause some uncertainty as market participants work through what it all means. Ultimately, our current view is that the downgrade itself will have limited longer-term impact on the fixed income markets as it was generally expected and does little to change our overall positioning or strategy.” (Note, however, that Neuberger has been and will continue to be generally underweight Treasuries in its fixed-income strategies.)

4) There’s Nowhere Else to Go.

Since the financial crash of 2008, investors of all ages are turning to cash due to a strong desire to protect their assets, according to an MFS Investing Sentiment Survey. However, what investors may not know is that what they call “cash,” meaning liquid assets that can be tapped immediately, includes some form of U.S. debt. The MFS survey defines cash as bank accounts, CDs and money market funds—and the fact is, money market funds invest in short-term debt obligations including U.S. Treasury bills.

3) S&P Stands Alone.

Compared to the other two rating agencies, Moody’ and Fitch, Standard & Poor’s has come out the most aggressively in its disapproval of how Washington politicians handled the debt-ceiling crisis and the need to make budget cuts. Both Moody’s and Fitch currently maintain their top ratings on U.S. debt, and have announced no plans for a downgrade.

2) President Obama and Warren Buffett Say So.

In a speech on Monday, President Obama said, “On Friday, we learned that the United States received a downgrade by one of the credit rating agencies, not so much because they doubt our ability to pay our debt if we make good decisions but because after witnessing a month of wrangling over raising the debt ceiling they doubted our political system’s ability to act. The markets, on the other hand, continue to believe that our credit status is triple-A.”  Then Obama pointed to a comment by billionaire investor Warren Buffett, “the oracle of Omaha,” who said not only that the S&P downgrade was unwarranted, but that “if there were a quadruple A rating, I would give it to the U.S.”

1) In a Beauty Contest, the U.S. Would Win.

Neuberger Berman’s downgrade comment says that in light of a slowing global market environment, Neuberger does not believe that the downgrade will change the trajectory of investor behavior related to the role U.S. Treasuries play. “Importantly,” the team wrote, “Treasury yields have traded down sharply in a flight to quality and on fear of a global slowdown.” In other words, the United States may look a little frayed around the edges right now, but compared to the ugly financial problems going on right now in European countries such as Spain and Greece, it looks downright attractive.

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