{"id":56701,"date":"2016-10-03T00:36:08","date_gmt":"2016-10-02T22:36:08","guid":{"rendered":"http:\/\/beta.next-finance.net\/opinion\/rethinking-the-role-of-treasuries\/"},"modified":"2019-12-31T01:08:25","modified_gmt":"2019-12-31T00:08:25","slug":"rethinking-the-role-of-treasuries","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/opinion\/rethinking-the-role-of-treasuries\/","title":{"rendered":"Rethinking the role of Treasuries"},"content":{"rendered":"

Depressed yields mean there is currently little safety cushion for holders of
\nU.S. government bonds. Just a 0.2 percentage point increase in Treasury
\nyields could wipe out a whole year\u2019s worth of yield income.
\n\"fixed_income_safety_cushion_and_volatility_2016.jpg\"<\/a>
\nOther fixed income sectors such as U.S. investment grade corporate bonds and emerging market dollar debt offer thicker safety cushions \u2013 with similar yield volatility in the past year. See the green and blue bars in the chart above.<\/p>\n

A higher price for long-term insurance<\/strong><\/p>\n

The collapsing cushion comes as long-term yields are starting to rise. We see a steeper yield curve ahead amid a gradual pivot
\ntoward fiscal expansion globally, although central banks still have the ability to limit any unwanted yield rises. Major central banks
\nare displaying a tolerance for letting inflation run hotter, and the Fed has adopted a go-slow approach to raising rates. Central banks
\nappear to be approaching limits in the effectiveness of extraordinary monetary easing, as was evident in the BoJ\u2019s shift last week to
\npolicy tools that steepen the local yield curve.<\/p>\n

U.S. Treasuries are becoming less attractive to non-U.S. investors, as the increased cost of currency hedging is wiping out the extra
\nyield Treasuries offer. Finally, bonds tend to have higher correlations to stocks during periods when markets are concerned about Fed
\ntightening, damaging their traditional role as portfolio diversifiers. This is a risk as the central bank\u2019s December meeting approaches.<\/p>\n

Longer-maturity U.S. government bonds still have a role to play \u2014 and should buffer portfolios in any flights to safety. But investors
\ntoday are paying a lot for this diversification benefit. We prefer shorter-term corporate and municipal bonds, whose yields have
\ntemporarily spiked ahead of U.S. money market reforms in October. Overall, we favor credit markets and see a role for other
\nportfolio diversifiers such as gold.