Is Uncle Sam Really Wiping Out Grandma and Grandpa?
NEW YORK ( TheStreet) -- With the confirmation hearing of Janet Yellen this week, Quantitative Easing has once again become the most popular topic of conversation in the financial media. We are hearing renewed complaints about how the Fed's creation of an artificially low interest rate environment is hurting -- in some cases destroying -- the dreams of retirees and savers. This argument is not only ignorant but misses the true risk to this American demographic.
I believe the true risk to the 80-year-old owner of bonds and CDs is not that their income stream today is so low, but that they are being given a once-in-a-lifetime trading opportunity and missing it. When interest rates -- and therefore yields on newly issued debt -- decline, the price of existing, higher-interest paper improves.
So even as the current options for fixed income investment and reinvestment (as bonds mature or are called) look about as appealing as the Griswolds' Christmas Turkey, something much juicier may be appearing in the "unrealized gain" column of these portfolios.
Below is a chart reflecting the interest rate on the 10-Year U.S. Treasury Bond going back twenty years.You can see that as recently as 1995, Uncle Sam was paying 5 percentage points more than he is today to borrow your money for ten years. Of course a 10-year bond issued in 1995 has long since matured; however, many other types of debt are issued at rates based on the 10-year Treasury. Some of these investments -- Corporate Bonds, Government Agencies, and Municipal Bonds -- may have appreciated dramatically for those who purchased when rates were much higher. That appreciation, though, is temporary and should be treated as such. The long-dated Treasury Bond Index (TLT), for instance, has doubled over the past ten years.
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