If you can help it, don’t buy US Treasuries.
Not buying Treasuries, by extension, means not putting your money into US dollar bank accounts or stuffing them under the mattress.
The main reason is that you’ll lose real value by doing so.
Money that sits still loses value because of inflation. Money that earns returns below inflation – as is the case for short-term Treasuries and US savings accounts currently -- also loses value.
Long-term US Treasuries do carry yields above US consumer inflation. However, the yields are not high enough to compensate savers for the interest rate risk given their long time frames.
“U.S. Treasuries and the bond market in general [are] simply overvalued compared to the prior 30 year,” said Bill Gross of PIMCO, who helps manage the world’s largest bond fund.
“Bond investors…are being shortchanged by 1 to 2 percent annually compared to historical norms and in many cases receive negative real yields,” he said.
So where should you put your money?
One place is the US stock market. First, stocks have historically returned more than bonds. Second, intuitively speaking, owning a business is a good hedge for inflation.
The second option is to go outside the US dollar.
Consider local currency foreign bonds, for example, that not only pay high yields but also benefit from local currency appreciation against the US dollar. There is also the carry trade in the forex market, which provides the chance for principal appreciation and pays a sizable interest rate differential.
A third option is precious metals like gold or silver.
Investing in them, however, may be risky or complicated. The safest route is physical gold or silver, but the disadvantages are the cost of storage and the inconvenience of transaction.
Investing in them through financial securities – whether it’s exchange-traded funds (ETFs), stocks of gold miners, or futures contracts – exposes you to the changes in leverage and liquidity in the financial markets.
Whatever option you choose, the one way to lose for sure is investing in US Treasuries. Gross explained that the US government cannot possibly pay back the money it owes fairly. Therefore, it purposely keeps yields low and picks the pockets of Treasury investors.
The US government reduced its debt burdens from WWII by picking the pockets of Treasury investors from the mid-1940s until 1979. Gross thinks it is now employing the same tactic some 30 years later.
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