Bond prices fall: time to sell US Treasuries?

Step-back a minute, what is a US Treasury bond? Basically this is a fixed interest rate instrument backed by the US Government, and is therefore arguably the most secure investment you could imagine. All the military and economic power of the US Government is there to defend your money.

However, bond prices rise and fall according to market interest rates: if rates rise then bond prices fall and vice-versa. Now until the past few weeks the impact of 11 interest rate rises by the US Federal Reserve had little effect on market rates - Alan Greenspan's famous conundrum - but this has started to change.

It is as though the US Federal Reserve has finally managed to convince the market that it is serious about raising rates, or more probably the market is taking a view on inflation and thinks higher interest rates will after all be necessary to contain US inflation, now running at 4.7%.

Bond sell-off in progress

A higher interest rate environment is bad news for bond holders who have bought bonds at a fixed rate. If interest rates go up then their bonds will be worth less money. Hence the bond market sell-off which naturally adds to downward momentum in prices.

Should US Treasury bond holders therefore exit the market now? One contrary argument is that US equities may crash, and that would produce a rally in the bond market, albeit possibly a short-lived one, due to the likely easing of interest rates to head off the impact of a stock market crash on consumer spending.

On the other hand, investors can see their US Treasury bonds falling in value today, and may not be so concerned about what might or might not happen tomorrow. From the point of view of technical analysis US Treasuries have broken out of their upward trading range - the classic indicator of a market that has changed direction.

So what should investors do to preserve the value of their assets? After all with inflation at 4.7% in the US holding cash in a bank deposit is yielding a negative return.

Alternative investments

It is also hard to make a case for equities with interest rates heading upwards, and inflation putting cost pressures on profits, and indeed all the major US stock indices are lower today than at the start of the year which suggests investors have taken this argument on board.

Real estate is also clearly something to avoid with interest rates rising - and putting pressure on those who financed their deals with loans that will now prove too expensive to service.

No, the prudent investor has to follow where Warren Buffett stashed his huge cash pile some years ago, and into safe haven currencies, precious metals and possibly oil and other commodities, although it may be a bit late for commodities given that the down cycle in industrialized economies is gathering force.