U.S. Treasury bonds are supposed to be the safe choice, but recently they've been acting like just another risky asset. At the height of the financial crisis, investors raced into ultrasafe government bonds—in the last three months of 2008 the price of 10-year notes ran up about 16%, sending yields as low as 2%. Now investors are fleeing Treasuries. Since December prices have fallen about 10%, and yields are at 3.67%. Some investors say Treasuries are still overvalued; others see opportunity in the pullback.
Treasuries are primed for a rebound. The U.S. economy won't recover soon, bulls say. But stocks and bonds are priced as though it will. Near-term inflation isn't an issue, and bad economic data or political unrest could renew the safe-haven appeal of Treasuries. And to keep mortgage rates low, the Federal Reserve may boost the amount of Treasuries it buys from $300 billion to $1 trillion.
THE STRATEGY: The iShares Barclays 3-7 Year Treasury Bond Fund, an exchange-traded fund, makes sense for buy-and-hold investors. Active traders who think Treasury prices have fallen too far can buy the iShares Barclays 20+ Year Treasury Bond ETF and sell on a recovery.
The U.S. government needs to sell a massive amount of Treasuries—$2 trillion at last count. When the economy turns, that flood of cash will lead to inflation, bears figure. With demand for anything but short-term debt dwindling, the U.S. will have to raise rates to entice buyers into long-term Treasuries. A return to the decade-long 4.3% average on the 10-year is likely—and some even see rates reaching 10%.
THE STRATEGY: For buy-and-hold investors, the advice is: Stay away. Those with a trading mentality can short the iShares Barclays 20+ Year Treasury Bond ETF. Two other ETFs can double a short bet: the ProShares UltraShort 7-10 Year Treasury and the UltraShort 20+ Year Treasury funds.
Levisohn is a staff editor at BusinessWeek covering finance and personal finance.