Speculation that U.S. Treasuries will crash

GET OUT NOW!!!

That's the headline of the cover article for this week's cover article in Barron's. Here are excerpts from the text:

THE BIGGEST INVESTMENT BUBBLE TODAY may involve one of the safest asset classes: U.S. Treasuries. Yields have plunged to some of the lowest levels since the 1940s as investors, fearful of a sustained global economic downturn and potential deflation, have rushed to purchase government-issued debt...

...the benchmark 10-year Treasury note yields just 2.40%, down from 3.85% as recently as mid-November. The 30-year T-bond stands at 2.82%, and three-month Treasury bills were sold last week for a yield of just 0.05%...

While a holder can expect to get repaid in full at maturity, the price of longer-term Treasuries could fall sharply in the interim if yields rise. The 30-year T-bond, for instance, would drop 25% in price if its yield rose to 4.35%, where it stood as recently as Nov. 13...

Treasuries offer little or no margin of safety if the economy unexpectedly strengthens in 2009, or the dollar weakens significantly, or inflation shows signs of reaccelerating. Yields on 30-year Treasuries easily could top 4% by year end...

There's nothing "new" or dramatically insightful here; the principles involved are well-known to any investor with a modicum of experience and sophistication. Many small investors and new investors will however tend to fall into the abyss if (when) interest rates rise again.

There is nothing unsafe about Treasuries - for the short term. You can always get your money back on instruments backed by the full taxing power of the government. The risk happens when "stretching for higher yield" with longer maturity bonds.

The Barron's article also offers suggestions for playing the interest rate rise through the use of ETFs (though the ones they cite are "ultrashort" and thus have a time component that may be difficult to factor in), and there is a discussion of corporate (and junk) bonds, and the use of TIPS and TIPS-based mutual funds.

Overall, an excellent read. In view of the bailouts initiated by the Bush administration and the economic stimulus proposals advocated by both the Bush and Obama administrations, it seems inevitable that the dollar will come under pressure and inflation will accelerate. When it does, you do NOT want to be holding long-term treasuries.