Run, Don't Walk From Treasuries

Historically, due to their favorable tax treatment and very low probability of default, municipal yields have been lower than Treasuries. Today, their yields are substantially higher than Treasuries mostly because of turmoil in the insurance markets and on Wall Street, both of which are heavily involved in the issuance, sale, underwriting and guarantees of municipals.

GNMAs yield substantially more than Treasuries and are backed the U.S. government. Fannie and Freddie debt is also now more explicitly backed by the U.S. government and yields substantially more than Treasuries.

What about diversification? Shouldn't Treasuries be part of any balanced portfolio? PIMCO's Bill Gross, who is considered by many people to be the best bond fund manager of all time, doesn't seem to think so. He has been selling Treasuries to buy more Fannie and Freddie debt.

Nevertheless, if you must own some Treasuries, you should probably buy TIPS, or Treasury Inflation Protected Securities. Although these don't really protect you from inflation because the government is reporting inaccurately low numbers, they are probably going to perform better than Treasuries that are not inflation protected.

The bottom line here is that U.S. bonds are only as good as the confidence investors have in our country and our government. That confidence has been shaken and will probably take years to restore. I am an optimist about this country, so I believe we will eventually get back on track.

However, in the short term, I believe that it is prudent to be very cautious. I agree with Seth Glickenhaus, a 94-year-old money manager who lived though the 1929 crash and the Great Depression, who believes that the U.S. has become soft. We have become more concerned about comfort than productivity. We have worshipped at the altar of immediate gratification and easy credit for decades.