Get real

10th October 2011 by The Value Perspective

By Nick Kirrage.

Can US treasuries at present really be described as ‘investments’ in any meaningful way? The US government is currently able to go to the bond markets and borrow at 3% for 30 years, which means once inflation is taken into account an investor might expect at best to scrape a small positive return in real terms but, more likely, the real return will be zero or even negative.

Even if you had the urge to ‘invest’ in a sports car, you would know that, while it would depreciate in value, you would at least have some fun. There is no good time to be had from buying a treasury – you cannot drive it quickly around a racetrack or sail it or watch television on it.

Of course bonds do have many aspects that make them attractive – particularly in a more distressed environment – central of which is a redemption date. One problem with value investing in equities is the question of a ‘catalyst’ – there is rarely any way for an investor to be sure of a date at which the value either will or will not be crystallised. With bonds you do have a definitive answer because you have a redemption date, albeit in the case of 30-year bonds, that definitive answer is quite a long way off.

If held to maturity, it is extremely unlikely anyone could justify 30-year US treasuries as a good total return investment. Let’s assume, 0.5% was the real return achieved on Treasuries over the next 30 years, it would actually take 139 years to double your money in real terms. Assuming you were able to invest today and get the long term real return from equities of c.4.5% (something the G&D valuation of the UK market suggests is possible), it would take you only 14 years to achieve the same feat of doubling your money in real terms. It seems investors today are willing to accept a poor long term return on government bonds, to avoid the emotional rollercoaster of medium term volatility in equities. And where’s the fun in that?

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