Safe Haven | Treasuries Are Not Risk-Free

"No warning can save a people determined
to grow suddenly rich." - Lord Overstone

HOME

ARCHIVES

FORUMS

SITE MAP

ABOUT US

Home -> Archives -> Daniel Aaronson and Lee Markowitz -> Treasuries Are Not Risk-Free

Printer Friendly

eMail Article

February 04, 2009

Treasuries Are Not Risk-Free
by Daniel Aaronson and Lee Markowitz

Markets may finally be starting to share our view that Treasuries will fall and gold will rise despite financial asset deflation. As you can see from the following link, Citigroup is now calling for a bear market in Treasuries.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aLo0Fh1bNmVw

Looking back to 2008, investors sold what they thought were risky assets - stocks, private bonds (corporates, mortgages, structured products) and real estate. With the proceeds, capital moved into what were perceived to be risk-free assets - Treasuries and gold. Gold is the true safe-haven whereas Treasuries are just another risky asset.

People try to defend treasuries by saying the US will never default because the government can always print money. However, just making that statement acknowledges that there could be risk of a United States Government default. Thus, government bonds should not be AAA rated nor are they risk-free assets.

During 2008, as stated earlier, money flowed to Treasuries because of their perceived safety. This was despite clear credit deterioration. Our government's tax revenues are falling because of the recession/depression, while the government's balance sheet is deteriorating as borrowing increases to support bailouts and stimulus. If a family or a business lost revenue/income and/or took on more debt, its credit score would be hurt and cost of borrowing would rise. This is what should have happened to the US Government in 2008.

As can be seen in the following link, Spain, a major developed country, recently lost its AAA rating. This means that the market is being forced to recognize that government bonds are not as safe as an asset like gold. This explains gold's recent move higher despite recent strength in the dollar. ALL citizens around the world should be buying gold, as they need protection from government defaults and inflationary stimulus policies.

Spain - http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aCL_6e5SsFVI

As government bonds fall in price, interest rates will rise in this country. This will create even greater stress on our broken economy. This will put downward pressure on risky assets, sending stocks, bonds and real estate lower while inflating the least risky assets. Rather than capital flows being split between government bonds and gold, gold will be the beneficiary sending it to prices that are currently unimaginable.

As always, we welcome comments/questions.

Daniel Aaronson
Lee Markowitz CFA
Continental Capital Advisors, LLC

Continental Capital Advisors, LLC was formed to offset the destruction of wealth caused by the global devaluation of currencies by central banks. The name Continental Capital symbolizes the 1775 US Currency, "the Continental", which was backed by nothing and quickly became devalued.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Certain statements included herein may constitute "forward-looking statements" with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Any action taken as a result of reading this is solely the responsibility of the reader.