Long Term Treasuries Doing Well In This Environment

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Includes: VLGSX, VUSTX, VUSUX
by: Holmes Osborne

Summary

Money rushes into Treasuries when markets decline.

Treasuries are guaranteed.

Vanguard has three low-fee Treasury funds.

With the drop in the financial markets, you might consider three Vanguard long term Treasury funds. It seems that money is rushing into Treasury bonds as they are one of the few things that are 100% guaranteed.

Quick lesson in economics. The Federal Reserve can create money at will. This is called "quantitative easing". Therefore, if a debt or liability is offered by the U.S. government and held in U.S. dollars, the Federal Reserve can create dollars and pay off the liability. The three funds below hold long term Treasury bonds.

The first is the Vanguard Long Term Treasury Fund (MUTF:VUSTX). The SEC yield is 2.34%, is 99.6% T-bonds, has $3.2 billion in assets, and holds 55 positions. The average maturity is 25.2 years. The fees are only 0.2%.

The second is Vanguard Long Term Government Bond (MUTF:VLGSX). The SEC yield is 2.44%, is 99.8% T-bonds, has $580 million in assets, and holds 70 positions. The average maturity is 24.7 years. The fees are only 0.1%.

The third is the Vanguard Long Term Treasury Fund (MUTF:VUSUX). The SEC yield is 2.42%, is 99.6% T-bonds, has $3.2 billion in assets, and holds 55 positions. The average maturity is 25.2 years. The fees are only 0.1%.

Why these funds? Because money flows into guaranteed investments in times of market down turns. Look at the chart below. As you can see, the 30 year yield has been tanking as the bonds are being bought up. So not only is a safe place to invest your money, it's a money maker too.

Click to enlarge

Of course the risk is if interest rates rise. In VLGSX, the duration is 17 years. That means if interest rates rise by 1%, $10,000 would become $9,300. These funds are not buy and hold. They are either part of a diversified portfolio or for the investor who likes to move money around.

You can buy the individual bonds too which we have been doing for clients. Be careful of what funds you choose. Many charge exorbitant fees for T-bonds. This isn't 1983 when rates were double digits.

Of course there are many other Treasuries one can look at. There are TIPS and shorter term bonds too. It is difficult to guess which ones would do best in a tough economy but thus far, these long dated bonds are doing quite well.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We are long T-bonds