Why to Own Long Term Bonds

Many investors say you shouldn’t own treasury bonds because interest rates are too low. You aren’t being paid enough to own them. We’ve owned long term treasury bonds in our Retirement Watch portfolios since June 2011 and have earned over 20% on them. We continue to own them because economic growth is slow, inflation is falling, and people want safety. We own them for capital gains, not for income, and there still is room for substantial capital gains. We’re lonely on this issue, but not alone. Van Hoisington and Lacy Hunt of Hoisington Capital Management agree with us. You can read an interview with Hoisington in the latest Barron’s. It re-enforces what you’ve already read in Retirement Watch and adds some more details.

Our expectation is that we are going to enter another recession next year, when we haven’t really fully recovered from the previous one. We think we are in what Niall Ferguson, a Harvard historian, recently termed a slight depression. This isn’t a normal business cycle. So long as there is downward pressure on prices, bond yields will either continue to go down or bottom out around the real rate, assuming that the inflation rate stops at zero. We aren’t there yet, obviously, but are headed in that direction. That’s why we’ve had a bull market and why it will continue until such time as inflationary expectations start to rise.