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Are U.S. Treasuries Really a ‘Safe Haven’?

Mar 20, 2012
Ron DeLegge

Warren Buffett affirmed the U.S. government deserves to have a quadruple A-rating. And long-term Treasury bond investors enjoyed healthy gains over the past year. But how safe are Treasuries and where's the next big opportunity?

Since the beginning of the year, it's been a "Tale of Two Cities" for U.S. stocks and long-term U.S. Treasuries. The Vanguard Total Stock Market ETF (NYSEArca: VTI) has swiftly risen, while the iShares Barclays 20+ Yr Treasury Bond ETF (NYSEArca: TLT) has swiftly fallen. (See chart below)

On the fundamental side, the Chinese of have been cutting their Treasury holdings and the Federal Reserve's massive shift from short-term (NYSEArca: SHY) to long-term Treasuries which soon ends. On the technical side, TLT is now trading below key technical levels. Are Treasuries really a “safe haven”?

A Bear Market in Credit Ratings
We can’t look at the U.S. Treasury market without noticing the dwindling influence of credit ratings, which is in the midst of a massive secular decline. This trend was first sparked during the 2008-9 credit crisis, when Moody’s (NYSE: MCO), Fitch Ratings, and Standard & Poor’s (NYSE: MHP) erroneously gave sub-prime mortgage debt a top score. Just days before its September 15, 2008 bankruptcy, Lehman Brothers financial products unit carried a triple-A credit rating from Standard & Poor’s!

Despite so-called reforms, neither the U.S. government nor credit rating agencies have taken any meaningful steps toward ensuring the accuracy of credit ratings. In essence, the Three Musketeers (Moody’s, Fitch, and S&P) are still the same conflict riddled entities they’ve always been.

Warren Buffett’s (NYSE: BRK-A) declaration the U.S. government deserves to have a quadruple A-rating sells the idea that U.S. Treasuries are a “safe haven.” Instead of getting to the crux of the matter, Buffett’s view reinforces a fairy land view of credit risk, which isn’t surprising, given his ownership stake in Moody’s. 

The thought that Moody’s or another credit rater is an impartial judge of the creditworthiness of the U.S. government or anyone else is comical. And so is the mistaken belief their integrity or judgment, as raters, are beyond question.

                   

For bond investors the message is clear: Obeying perverted investment advice always leads to perverted results. Or as the Bible says, “What a man is sowing is what he shall reap.” Here’s what it means: Bond investing based upon ratings is a broken strategy at all levels of the investment game. 

Pinpointing Major Shifts
Over the past year, the ETF Profit Strategy Newsletter was correct in pinpointing major shifts in the bond market. We cut through the noise and focused on the facts.

Ahead of the debt ceiling crisis on August 2, 2011, many of Wall Street’s talking heads were telling people to short U.S. Treasuries (NYSEArca: TLT). Here’s what we said to our subscribers on July 27, just days before the historic debt deal deadline:

“No matter how much media headlines make it seem that a debt deal will not get done, the historical odds show the exact opposite. If a debt deal gets completed, how will the U.S. government bond market react? Funds like the iShares Barclays 20+ Yr Treasury Bond ETF (TLT), ProShares Ultra 20+ Yr ETF (NYSEArca: UBT), ProShares Ultra 7-10 Yr ETF (NYSEArca: UST), Direxion Daily 30 Yr Treasury Bull 3x Shares (NYSEArca: TMF)  and other U.S. government bond ETFs will likely have relief rally. And therein lies the potential short-term profit opportunity to take long Treasury positions during today's uncertainty and to sell after a rally occurs.”

In retrospect, not only was our assessment of U.S. Treasuries the right call, but long-term Treasuries were so strong, we advocated holding onto them to our subscribers. As it turned out, long-term Treasuries gained almost 34% in value in 2011, totally crushing Treasury bears.

The Investment Theme of Our Generation
Ahead of the Federal Reserve’s ending of “Operation Twist” in June 2012, ETFguide has already outlined to its subscribers the next big opportunity in bonds (NYSEArca: AGG) and U.S. Treasuries. We don’t use credit ratings, but rather, high dosages of common sense along with a dashboard of key financial metrics. 

In the growing maze of ETF choices, we’ve made it simple because our readers know which Treasury ETFs to be long and which to avoid. The next unfolding trend in Treasuries is a major theme we’ve identified as “one of the biggest investment events of our generation.”

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