Transcripts

"Reviving the Economy"-Treasury Bond Safety

SUSIE GHARIB: Treasury bond prices fell again on speculation that the recession is nearing an end. The yield on the 10-year bond is the highest it's been since November as the government gets ready to sell billions of dollars in debt this week. Experts fear rates will have to increase further to attract investors. As we continue our "Reviving the Economy" coverage, Suzanne Pratt reports that some people are questioning the safety of ultra-safe Treasuries.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: If ever there were a safe investment, U.S. Treasuries are it. After all, they have the full faith and credit of Uncle Sam behind them. And since last fall, when stocks cratered and real estate tanked, Treasuries have been in big demand. In the last several weeks, however, some investors have started to lose their appetite for government bonds because of growing concern about risk. The scariest on the list of risks is default. After all, China, the U.S. government's largest creditor, is worried about its holdings of Treasuries. So, shouldn't other investors also be concerned? Fixed income expert Suvrat Prakash says absolutely not because there's no chance the U.S. will default on its own debt.

SUVRAT PRAKASH, INTEREST RATE STRATEGIST, PNB PARIBAS: The Treasury debt is the first in line to be paid off by the U.S. government. So if you're thinking that there's anything else in the fixed income world or even in equities that's even safer, then it's hard to imagine that.

PRATT: Don't forget the U.S. government can always print money to meet its obligations which brings us to the second and growing risk for Treasuries: inflation. UBS bond expert Anne Briglia says Treasury investors loathe inflation, which erodes bond values.

ANNE BRIGLIA, SR. FIXED INCOME STRATEGIST, UBS WEALTH MANAGEMENT: There's concern about inflation. Obviously it's not going to be a problem this year or next year because of excess capacity. But over the long run, I would say the concern of market participants is will the Fed begin to raise rates soon enough when it needs to?

PRATT: Does all this talk of risk for government bonds mean investors should steer clear or at least reduce their exposure? Financial planner Scott Brewster isn't recommending portfolio changes, but says Treasuries are at greater risk today for returning less down the road.

SCOTT BREWSTER, BREWSTER FINANCIAL PLANNING: We could see high inflation in the future. Bottom line unfortunately is no one knows. But, with rates as low as they are and if we go into a period of high inflation, long and intermediate term Treasuries could have some pretty bad years.

PRATT: One way for investors to minimize risk in their portfolio is to stick to shorter maturity Treasuries, like two-year or five-year notes. Ten year or 30-year bonds are thought to be too volatile for most investors in the current environment. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.