Long-Term United States Treasuries Are Awesome

In previous posts, I discussed the negative correlation of long-term United States Treasuries, and how they can add value to your portfolio via diversification.

Today’s post is inspired by stock market returns at the moment – where United States long-term Treasuries are up and everything else is down. Take a look below:

Most asset classes are having a bad day. From domestic large value to international real estate, returns are in the red. The exceptions are those funds holding United States long-term Treasuries, which are in the green. This is the negative correlation of long-term United States Treasuries manifested, and the reason why this asset class deserves a place in your diversified portfolio. 

Note that both long-term Treasuries and United States Inflation Protected Securities (TIPS) are up. Certain tips funds, the Schwab TIPS fund as an example, holds a portion of inflation-linked bonds with maturities of 10 years or greater. As of this writing, that portion is around 26%. Vanguard’s Long Term Treasury ETF VGLT, however, holds only bonds with maturities in excess of 10 years.

Were trading commissions and bid/ask spreads not an issue, an investor could even seize this opportunity to rebalance their portfolio: selling high and buying low. (Yale University's endowment actually rebalances certain portions of their portfolio daily.) Alas, such fees – whether divulged (trading commission) or concealed (bid/ask spreads) – do exist. Thus, only occasional rebalancing is suggested.

So while the high duration of a long-term United States bond may scare you away in today’s low interest rate environment, consider that long-term government bonds offer value in addition to their now-small coupon payments. Long-term Treasuries can act as a powerful diversifier in your well-diversified portfolio.