Long Term Bond YieldsLong Term BondsTreasury Bonds have enjoyed a massive run in recent years as safe havens, outperforming most equity indexes.

According to investment-research firm Morningstar, a portfolio of U.S. Treasurys with an average maturity of 20 years—the quintessential safe haven—rose 28% last year, even better than its 26% jump in 2008. You would have to go back to 1995 to find a better year.

What drives this activity? in large part, the global chaos of financial markets  is the prime mover.  People seek safety and TBills are the prescription.

The US government is reinforcing this with its aggressive rate manipulation and artificially low yields as it tries to get our economy back on track.

But what happens either when selling pressure mounts, or rates rise? prices will have to fall.  Investors holding Tbills should be aware of the grave threat of rising rates- they could see massive principal losses. Also,

For investors who merely want to buy bonds and hold them to maturity, to collect the interest, the bigger risk is that interest rates remain below the rate of inflation, thus eroding returns. Already, with inflation clocking in at 3.4% in November, the latest data available, investors who buy 10-year Treasurys today and hold them to maturity would lose about 1.5% annually.

Some other risks?

Whatever you do, avoid long-term Treasury bonds, experts say, because their value can fall sharply if interest rates rise. The SPDR Barclays Capital Long-Term Treasuryexchange-traded fund, which invests in Treasurys with maturity dates between 10 and 30 years away, dropped 13.1% in 2009, when investors piled back into the stock market and pruned their bond holdings, according to Morningstar—not the kind of return investors want from their “safe” assets.

Safe money allocations are critical- don’t think that just because you are in TBills, that your money is safe, however.

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“For all time periods and for all portfolios, the addition of the annuity leads to a decline in the portfolio failure rates.”

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