8/11/16

Chicken Little sees the end of his love affair with Treasury Bonds



Chicken Little has been in love with Treasury Bonds for a decade. Now, in a betrayal of that love, Chicken Little has sold some Treasury Bonds. Furthermore, Chicken Little will not buy any more 30-year Treasury Bonds for the foreseeable future. This post has three parts. 

1. Treasury Bonds have been an amazing investment
2. The Future of Treasury Bonds is worse than the Past
3. Chicken Little is looking for new investment love 

Chicken Little's Love for Treasury Bonds is Waning

1. Treasury Bonds have been an amazing investment

An investor dreams of high returns with low risk. Over the last decade, by some measures, long-term US treasury bonds have been the best investment. Treasury bonds have had very high returns and low risk.


Treasury Bonds have posted gaudy returns with low risk 


The following table contains the 1-year, 5-year, and 10-year total returns for stocks, bonds and gold. 


AssetSymbol10-year5-year1-year
US Long-Term Treasury BondsUS treasury93.18%50.54%16.81%
US StocksDIA93.13%76.64%8.29%
Non-US StocksEFA14.87%24.93%-5.72%
Emerging Market StocksEEM31.69%-2.83%7.87%
GoldGLD107.35%-25.17%20.32%
** Total return including dividends and interest (without re-investment). 

In the last year, Treasury bonds have returned 16.8%; over the last 10 years, investors have almost doubled their money by earning 93%. Furthermore, Treasury bonds are among the safest investments. 

For investors who care about both risk and return, I believe Treasury bonds have been the best investment for the last decade. While it is true that gold has had the highest 10-year return, and US stocks have had the highest 5-year return, Treasury bonds are safe, and Treasury bonds have not had the horrible declines of stocks or gold. 

Bonds have been the best investment for scaredy cats like Chicken Little. Furthermore, Chicken Little has had significant investments in Treasury bonds throughout this entire time. This has been verifiably true throughout the period of Chicken Little's public investing. The first, "Where does Chicken Little invest article" includes, "98.75 percent of my family’s money is invested in cash or Treasury obligations" and showed this chart: 


Chicken Little Loves Treasury Bonds

In March of 2016, Chicken Little increased the investment in long-term treasury bonds

Treasury Bonds have been a great investment, and Chicken Little has been in love with them for years. 


2. The Future of Treasury Bonds is worse than the Past

The future returns on Treasury bonds will be lower than the past returns. The table below shows annual returns that have been earned and will be earned for Treasury bonds owned for 1-, 5- and 10 years. 


Annual return earnedFuture annual return
30-year Treasury bought 10 years ago9.32%1.82%
30-year Treasury bought 5 years ago10.11%2.10%
30-year Treasury bought 1 year ago16.81%2.21%

The future returns are lower than past returns. Consider the returns on an investment of $100,000 in the 30-year treasury bond made one decade ago. Over the past decade, this investment has earned $93,200. Over the next two decades, this investment will earn a total of $36,300.


Future Treasury bond returns will be worse that past returns

Future bond returns are sure to be lower than past returns. Does that mean we should all sell our long-term Treasury bonds? No. 

In fact, Chicken Little still owns a lot of Treasury bonds. Why? In the past, Treasury bonds were safe and had high returns. While future returns will be low, Treasury bonds remain safe. If the US ends up with even lower interest rates like those in Japan and Germany, then Treasury bonds may be one of the few sources of any interest. 

Chicken Little is falling out of love with Long-term Treasury Bonds. Chicken Little has sold some treasury bonds and will not buy any more for the foreseeable future. 


Chicken Little sees the end of love for Treasury Bonds


3. Chicken Little is looking for new investment love 

With respect to investments, Chicken Little is single. 


Chicken Little is looking for Investment Love

Here is a little secret (and don't tell my bonds). From 1982 to 1999, Chicken Little was in love with stocks. Stocks were great investments and Chicken Little never imagined an end to that first love. 

Chicken Little's break up with stocks was emotional with acrimony and mutual accusations. This second big breakup is less traumatic for Chicken Little, but still challenging. 


Chicken Little is on the market











2 comments :

  1. While Chicken Little may want to use some type of service (match.com or eharmony) to 'find' love, fortunately or unfortunately, such service has little value where the population of new 'alternative' founts of love are already known.

    Thus to start CL needs to understand his needs and wants. From the outside looking in it appears that CL wants the safety and security of a longterm relationship with the occasional possibility of a 'swing from the chandelier' experience (with little risk he will be caught and/or catch something- and we know what happened to those who participated in sites such as 'Ashley Madison' -short term gain/long term negative consequence).

    Based on the above and the charts provided (and CL's belief that long term we are in for a deflationary spiral - read as 'dry spell' in terms of romantic love) would not CL opt for cash position as currently maintained; gold position maintained or increased; purchase of AAA+ corporate bonds and preferred stocks in blue chip companies that guarantee a return; and perhaps staggered option purchases of the three major indices premised on a decline of stock prices (purchased over time with some portion but certainly not all of the proceeds of bond sales).
    CL would then have his longterm relationship in place; interest income from relative safe sources (with liquidity available - i.e., the ability to play the field); and, the ability to have the thrill of a fling if the market collapses as CL believes it will (thus the option purchases are the equivalent of protected misc. experiences - with prophylactic protection - as even if the options expire as worthless - there is always penicillin - as CL only engaged in extremely limited 'risky' behavior).

    Just some thoughts (and made under the assumption that CL owns or rents a home; lives within his means; and, looks forward to other steady sources of income from his social security and/or pension (should he be lucky enough to have one).

    What do you think ?

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    Replies
    1. Thank you PM. CL been off the market for awhile so can use the advice. Cash is definitely in the mix. I will write a post in gold relatively soon.

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