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January 20, 2006 at 07:00 PM
For people looking to invest in U.S. Treasuries in 2006, which ones look the best?
The answer, bond market observers say, is intermediate-term securities.
“If you’re going to buy bonds, that’s the place to be,” said David Wyss, chief economist for Standard & Poor’s.
Yields on short and intermediate-term Treasuries shouldn’t move much over the course of the year because they’re already discounting expected near-term interest rate hikes by the Federal Reserve, Wyss said.
But that’s not the case with bonds with long maturities, according to Wyss, who sees yields for these securities rising, thus pushing their prices, which move in the opposite direction, lower. “Plus, you’re really not getting any premium for the risk of holding a long-term security,” he said.
Normally, long-term bonds carry a “risk/liquidity” premium that makes long-term rates average more than short-term rates, Wyss said in an economic forecast this month. In late December, however, the yield curve inverted.
Observers think the central bank will raise rates by a quarter-point two or at most three more times early in 2006 before ending its campaign to tighten monetary policy.
Mary Miller, director of the fixed income department at T. Rowe Price Funds, said intermediate-term Treasuries suffered the worst price erosion while the Fed increased rates over the last 18 months. Now that the bulk of its work appears done, however, “I think it’s sort of safe to go back in the water,” she said, referring to the asset class.
In the current interest rate scenario, investors buying intermediate-term Treasuries could capture about 97% of the return of the benchmark 10-year note without taking on the added risk that comes with long-term bonds, said Neil Burke, a member of the intermediate total return group at Loomis Sayles & Co.
