In an interview with CNBC on Wednesday morning, Harvard Professor Martin Feldstein argued that US Treasuries are in a Fed driven "bubble."
Feldstein's comments echoed the comments of legendary stock investor Warren Buffett last month that US Treasuries are artificially priced, and investors can lose a great deal of money holding them at this point. Legendary bond investor At around the same time, Bill Gross seemed to think otherwise. His $289 billion fund raised its U.S. Treasury holdings to 33 percent. Which side is right?
Only time can tell for sure. However, there are compelling arguments to be made on both sides of the market. On the bearish (Buffett side) is history. For the last five years, U.S. Treasuries have yielded spectacular returns to investors who have been on the long side of the market. The iShares Barclays 20+ Year Treasury Bond (TLT) is up close to 40 percent compared with 18 percent for the S&P500 (SPY). History further confirms that bond yields are near historical lows, as alternative investments like Treasury Bills and Treasury bonds are near zero. But can yields stay at these levels once central banks begin exiting Quantitative Easing?
Judging from today's market action, the answer is no-US Treasuries sold off after the Fed signaled that it may moderate its bond buying program. But setting momentary emotions aside, arguments for the bond market can go on both sides.
On the bullish side (the Bill Gross side) is a week U.S. and global economy with plenty of excess capacity at the verge of deflation rather than inflation, which may drive bond yields lower - the Japanese 10-year Treasury yield has been well below 1 percent for almost a decade. On the side of bulls are also demographics - a retiring cohort of baby-boomers who need income but cannot tolerate the risk associated with high-yield bonds. A third factor on the side of the bulls is the yen Tsunami that is favorable for U.S. Treasuries, as we did write in aprevious piece.
What should investors do?
The answer depends on the personal profile of each individual investor. For those investors who are near or in retirement, U.S. Treasuries may still be a good investment choice. Nevertheless, I would go with a short-term maturity fund like the PIMCO Enhanced Short Maturity ETF (MINT) or medium maturity fund like the iShares Core Total US Bond Market ETF (AGG). For younger investors, there may be better alternatives in the equity sectors with a demonstrated revenue growth momentum, as we did write in a previous piece.