The US bond market is a mess and government interest rates are still being artificially maintained at an all time low and will continue to be low until 2013.
Right now, you have to invest in a government bond that has a 10 year maturity just to get 1.97% a year. And that’s investing in a US Government Bond. This is much lower than the kind of interest you have to pay for a 2500 unsecured signature loan on the internet.
If you look at the US versus the Eurozone, our debt is only going up, and their debt… well, their debt may wipe out the Euro. If one more country needs to be bailed out of if Greece or Ireland default on their debt payments, the Euro as we know it may not exist.
The Euro carries too much of a risk premium to consider investing in it. There is way too much risk. I had a friend bet me a year ago that the dollar would be gone in a year. Obviously, I won. However, I would take that bet against the Euro failing in the next year if they don’t make significant changes.
And then there is the US – in 2016 the US can’t afford all the debt payments that we have on our current debt. For an individual, that spells bankruptcy. For the Government, well… I don’t know what that means.
What I want to know is why would you take the risk in investing in the US Government debt, and especially at a rate that barely keeps up with inflation and you have to wait 10 years to get your principal back. But there is a solution.
Look towards corporate debt. The US Government may not be a rock solid bet, but the companies in the US can still generate a profit and are still run by the entrepreneurs of the world with ideas that lead the rest of the world.
Look at companies or funds with very strong balance sheets, lots of cash on hand and very little debt. On a bond fund with an average yield to maturity, you can get an average yield that is 1.5% more thank you would get on any government bond.
I would prefer corporate bonds over US Government bonds every day of the week. I continue to believe in the American entrepreneur and not the federal government to pull us out of this economic downward spiral. As long as corporations have strong earnings, even if they are only up slightly year after year and they have a very low debt to income ratio, they should be strong candidate. I would even take higher risk bets in companies over Government bonds right now. A few high yield bonds will add great yield to your overall portfolio, with minimal levels of risk.
The bottom line is that you don’t have to stay out of the US bond market which has rallied this past summer, just invest in the smart areas of the market. Put your faith in the business owner instead of the politicians.
For more than 20 years, Julia Lundstrom, CFP has been on the front lines of investing and financial planning for individuals and businesses. You can read more about her recommendations on strategic asset allocation and diversification by signing up for a free investment report at http://cb.refinedassetallocation.com/report or by reading her blog at http://refinedassetallocation.com/blog.