Chapter 5The High Value of Low-Yielding Treasuries within the Balanced Portfolio Framework

Treasury bonds are government guaranteed instruments that promise to pay a fixed interest rate over time. The principal value of the bond has nearly zero risk of loss because the issuer, the U.S. government, effectively has the ability to print money to repay the bondholder. As a result, Treasuries are often considered to be risk-free. However, this is only true if you buy a bond and hold it to maturity. The price of Treasuries fluctuates every day because these bonds are publicly traded. The price moves as the future economic environment unfolds and as expectations of the future shift. Thus, you can lose money if the bond is sold prior to maturity. When I discuss Treasuries in this chapter and in this book, I am referring to bonds that are generally not held to maturity, as my emphasis is on trying to achieve stable returns through time. Thus, the volatility in the price of the bonds becomes an important consideration.


In the last chapter we covered one of the most popular and widely owned asset classes, equities. In this chapter, we turn perhaps to the other end of the spectrum. Many investors believe that Treasuries, because of their low yields, are one of the least attractive asset classes. Today, Treasuries may be the one asset to which you are most averse. You might question why anyone in their right mind would invest in an asset class that offers a very low yield with ...

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