What with the World Cup history, it may surprise you to learn that a sporting event with no seeming connection to U.S. Treasurys indeed has one — at least if you listen to some pundits who would flatly deny taking too many soccer balls to the head.
The phenomenon is known as “FIFA Fever” and here’s how it works. Data for the last five FIFA World Cups appears to show a correlation between a drop in the U.S. 10-year Treasury bond yield and the matches themselves, at least when fans are glued to the screen.
Figuring out Treasurys isn’t a game, however.
[See: 7 Bond Funds to Buy as Rates Rise.]
Treasurys confuse many a market novice or intermediate investor. Perhaps it’s because of their name or the fact that they don’t operate via the same laws of marketplace fluctuation as various investment sectors. Energy stocks benefit from higher oil and natural gas prices; pharmaceuticals soar when new drugs gain FDA approval; technology companies take off when overseas markets for smartphones open up.
But no such product — or any commodity, really — drives Treasury prices, not even sales of Team Croatia jerseys.
Treasurys are bonds — money that you in essence loan to the U.S. government and collects interest. They come in denominations based on the length of the bond, such increments of two, five or 10 years. U.S. Treasury securities are also viewed as one of the safest investment options around.
Steven Jon Kaplan, founder and CEO of True Contrarian Investments in Kearny, New Jersey, likes U.S. Treasurys for all clients and especially his conservative ones. “One little-mentioned advantage is that the interest paid out is free of state and local taxes,” he adds, “so those who live in high-tax areas such as California and New York City have an extra incentive to own U.S. Treasurys instead of bank CDs or a money-market fund.”
“There’s no default risk,” says Jack K. Riashi Jr., a financial advisor with Bloom Asset Management in Farmington Hills, Michigan. “The federal government will never, ever default on these bonds so investors are assured of getting repaid their principal and paid their interest.”
And David Ader, chief macro strategist at London-based Informa Financial Intelligence, goes so far as to declare: “Treasurys are the highest quality investment in the world. … They have the highest credit rating of anything, anywhere.”
Still, interest rate risk can knock Treasurys off balance. Think of a seesaw: the exact image the Securities and Exchange Commission uses in an investor education document that explains the phenomenon. Rising market interest rates equal lower fixed-rate bond prices; falling rates equal higher prices.
[Read: How Working Out Can Help You Invest.]
“In this current interest rate environment, an investor has to be careful about maturities, unless they are planning to hold the bonds until maturity,” Riashi says. “They may experience a substantial amount of volatility as interest rates move up and down. As interest rates climb, it could be a good idea to purchase longer-dated T-bonds.”
And with the Federal Reserve expected to raise interest rates four times this year, investors should exercise some vigilance when adding Treasurys to the fold — though not to the point of fearing buyer’s remorse. By contrast, seller’s remorse poses more of a threat.
“People, real people, shouldn’t buy Treasurys to trade but to buy and hold. Is now a good time?” Ader says. “The Fed is hiking rates so short trades, say less than three to five years, probably will go up a bit in the next year. Buying bills allows you to roll over that debt every few months to capture the rising rates and, when you like, reinvest for longer maturities.”
“If you need to sell a Treasury before it matures you could see significant changes in what the market is willing to pay for your Treasury,” says Brian Rehling, co-head of global fixed income for Wells Fargo Investment Institute in St. Louis. “Given that Treasury bonds have low risk they also offer some of the lowest yields in the fixed income asset class.”
All of this makes Treasurys especially advantageous for investors trying to lower the risk exposure in their portfolio.
“We believe fixed income still maintains its position as a ballast to volatility and a safe haven in the event that markets recede,” says Michael Olivia, an investment advisor representative with WestPac Wealth Partners in La Jolla, California. “This should be taken in consideration of investor time horizon, total risk exposure on the personal balance sheet — for example, a business owner, taking significant risk in their business, may be averse to taking additional monetary risk in equity markets.”
By contrast, Olivia says: “Younger investors, or those with a larger appetite for risk, would tend to shy away from Treasurys as they do not offer the potential return that an equity or leveraged investment may offer.”
[See: 9 Ways to Invest in Business Development Companies.]
Or if you like: A winning investment goal with Treasurys requires a much longer time frame than a winning soccer goal.
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Investors Savor Treasury Bonds originally appeared on usnews.com
