Steer Far Away from Long Bonds and Preferred Stock Right Now (and from Anyone Pushing These Securities)

A good friend of mine in money management who I ordinarily think very highly of told me this weekend that he likes the 15-year US Treasury bond. I’ve also seen this same endorsement of the longer term US Treasuries from money managers and other talking heads on CNBC and Bloomberg. With the recent move in interest rates, many have seen the appreciation in long bonds and preferred stock in a short period. They have begun espousing (and promoting) the idea that investors should be only in equities and bonds, and backing it with evidence that some Austrian government debt has increased by 50% this year as their long-term interest rates have turned sharply negative. Therefore, they suggest that you need to buy the 15-year US Treasury bond at 1.50% or the 30-year US Treasury bond at 2.00% or preferred stock wherever it is trading.

This advice is inappropriate for every individual investor, and everyone espousing it needs to take a bond pricing class. They are widely offered in MBA programs and I learned a lot from mine at Columbia some 20 years + ago. Without going into all of the details, let me just say that if longer term US Treasuries go back to 3%, you will experience a 30 to 35% loss in the value of any Treasury instrument with a duration over 15 years and any preferred equity instrument (these have infinite duration). It will be instant and you will not know what hit you.

Europe has negative interest rates. The US does not. This does not mean that the US will have negative interest rates in the near future or ever. It is more likely that Beyond Meat will completely replace meat in the near future and I do not think that is going to happen.

Now, savings and CDs may not be as sexy as equities (which you may want to have exposure to), but at this point in the cycle they are a whole lot safer and more sexy than long bonds or preferred stock (which you absolutely should not be buying).