As the hotly contested
for the financial industry is debated this week in Congress, investors are anxious to find a safe place to invest.
, I featured one open-end financial mutual fund and one financial exchange-traded fund that could benefit from such a bailout.
Today I offer one key investment area best avoided until the dust finally settles: long-term Treasury bond mutual funds. Why? These funds would almost certainly be hurt by the gigantic issuance of Treasury debt that would be required to implement the rescue package.
U.S. Treasury bills, notes and bonds represent the ultimate in safe investments, as the U.S. Treasury Department is the only organization that absolutely guarantees payments of interest and principal. In a worst-case scenario, it is the sole organization with the authority to print the money needed to pay its obligations.
But that doesn't mean Treasury paper doesn't fluctuate. Long-term Treasury bond prices move inversely to changes in interest rates on federal obligations. For example, 30-year T-bond yields approached 4% last week and then jumped nearly half a percentage point as talk of the bailout got serious.
The price of the benchmark
iShares 20+ Year Treasury Bond ETF
touched 100.86 on Sept. 16 and four trading days later sank as low as 92.60 -- an 8.2% tumble. In stock market terms, that would translate into to 900-point tumble in the
Dow Jones Industrial Average
So to avoid additional erosion to values, avoid additional commitments to long-term Treasury bond funds until the bailout issue is resolved. Funds such as the seven in the accompanying table could turn out to be profitable investments once the Treasury has finally issued all the bonds necessary to achieve the proposed rescue, but they would likely experience price erosion if Uncle Sam is required to issue new debt in the hundreds of billions of dollars.
The long-term bond funds in the adjoining list are solid investments. Each fund is absent any front-end sales charge. The list represents the long-term Treasury funds that experienced the highest volatility of returns over the past 24 months as measured by their standard deviations of returns (ranges within which they tended to fluctuate from their respective trends).
And the table is a rarity in 2008 -- a tabulation of fund returns devoid of minus signs. But new positions in the funds are best postponed until increases in long-term T-bond rates have peaked and are poised to settle to lower levels. In the interim, T-bills as well as short-term and possibly intermediate-term notes present less volatile alternatives.
In fact, the funds themselves caution prospective investors that their vehicles are subject to volatility.
"The fund is best suited for long-term investors who can tolerate wide share price fluctuations," warns the
Wasatch Hoisington U.S. Treasury
in its fund literature.
"Aggressive risk" and "high price fluctuation" are words accompanying the descriptive materials for the
American Century Target Maturity-2020
American Century Target Maturity-2025
funds. Each fund warns that it "can provide a relatively dependable return if held to maturity, but is subject to dramatic price fluctuations which may result in significant losses or gains if sold prior to maturity."
So the logical course of action would be to hold off on long-term Treasury bond funds until your judgment is that interest rates have peaked. At that point, investments in funds such as those on the nearby list will enjoy the double-barreled impact of the higher interest rates plus the appreciation in prices from the declining rates.
For more fund investment ideas such as this, check out the Ratings Section of
Richard Widows is a senior financial analyst for TheStreet.com Ratings. Prior to joining TheStreet.com, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.