The Treasury market has been making news, and not in a good way. Just past the midway point of the first quarter, Warren Buffett announced that the investors rushing to buy T-Bills that paid next to nothing were making a big mistake. He predicted massive inflation as a result of the government stimulus efforts and categorized the Treasury market as being in the same category as "the internet bubble of the late 1990s and the housing bubble of the early 2000s."

Investors, of course, were flocking to Treasuries because they offered the only shelter from the storm in 2008. Demand coupled with an ailing economy drove interest rates down and prices up.

Yield Ups and Downs
On December 18, the benchmark 10-year Treasury offered a yield of 2.08%. It opened the new year on January 2 at 2.4%. By the middle of June, it came in near 4%, and currently hovers near 3.75%.

Prices move inversely to yields, so the investors who overpaid for a yield that was nearly 50% lower than the current rate are not sitting in a pretty place if income generation is their main objective. Nor are they well positioned to sell at a profit as few investors would be willing to pay a premium for low yields. (Want to learn more? Check out Get Acquainted With Bond Price/Yield Duo.)

The Fed Influence
Although the Federal Reserve has announced that inflation in not a threat, investors have lingering fears that the fed is wrong. Politicians and the press speculate daily about how the government will turn off the tap and extricate itself from the role of economic engine and what impact that will have on interest rates.

A rise in inflation would make those low bond yields worth even less. Those pundits not focused on inflation are speculating about deflation. Severe deflation tends to drive bond yields down. Where does all of this leave investors?

What to Do?
Learning from your mistakes and the mistakes of others may be the best lesson here. At one point last year, investors were buying short-term Treasuries despite negative yields.

Buying Treasuries when the yield is negative means that investors paid for the guarantee of losing money. Panicked investors viewed this as a better choice than investing in stocks, which were dropping with no end in sight. (Can you profit from market fallout? Read Profiting From Panic Selling.)

When panic sets in, investors tend to move money based on short-term market conditions rather than making strategic choices. If you've got your net worth tied up in Treasuries, don't make the situation worse by making another mistake. Look at your portfolio and move your assets to an appropriate asset allocation.

Once that's done, stop reacting to short-term events. Set a strategy that's right for you and make changes only when your personal financial goals have changed or been achieved. Next time the market goes for a wild ride, sit back and watch, don't chase it with your hard-earned dollars.

Related Articles
  1. Economics

    Understanding Cash and Cash Equivalents

    Cash and cash equivalents are items that are either physical currency or liquid investments that can be immediately converted into cash.
  2. Professionals

    Holding Out for Capital Gains Could Be a Mistake

    Holding stocks for the sole purpose of avoiding short-term capital gains taxes may be a mistake, especially if all the signs say get out.
  3. Professionals

    Why Investors Should Consider Cash Right Now

    With so many market watchers thinking that the current stock rally is getting long in the tooth, investors might considering upping their cash holdings.
  4. Investing

    Payroll Processors, Regional Banks await Rate Hike

    Short-term interest rates are creeping higher, which is good news for money market fund managers, payroll processors and consumer banks.
  5. Economics

    Is The EU Holding Germany Back?

    As Germany agrees to initiate bailout talks with Greece once again, could all of the EU's economic turmoil result in Germany being better off alone?
  6. Mutual Funds & ETFs

    The Top 4 ETFs For Investing in US Government Bonds

    Discover the top four ETFs that invest in U.S. government bonds with maturities ranging from zero to 25 years, including nominal and inflation-protected bonds.
  7. Economics

    The Biggest Items Obama Is Still Missing From His Mandate

    Learn how the biggest items missing from Obama's mandate include various forms of tax reform and closing the Guantanamo Bay prison in Cuba.
  8. Investing

    Why Cash is King When Markets are Volatile

    After the past several years, you might be addicted to equity. But when markets turn volatile, cash is the best option. Here's why.
  9. Investing Basics

    What are Cash Equivalents?

    Cash equivalents are money market instruments.
  10. Economics

    A Comparison Between a Default and a Collapse

    Is the Greek default similar to the Lehman Brothers collapse?
RELATED TERMS
  1. Regional Asset Liquidation Agreement ...

    An agreement between an asset manager and the Federal Deposit ...
  2. The New Deal

    A series of domestic programs designed to help the United States ...
  3. Accelerated Resolution Program ...

    A program designed to reduce the time and cost of resolving failed ...
  4. Asset Liquidation Agreement (ALA)

    A contract between the Federal Deposit Insurance Corporation ...
  5. Capital Loss Coverage Ratio

    The difference between an asset’s book value and the amount received ...
  6. Gross Cash Recovery (GCR)

    The gross cash colloctions expected over the remaining life of ...
RELATED FAQS
  1. What are some examples of money market funds?

    Money market mutual funds are designed to offer savers low-risk, liquid and short-term investments. They are normally offered ... Read Full Answer >>
  2. Do negative externalities affect financial markets?

    In economics, a negative externality happens when a decision maker does not pay all the costs for his actions. Economists ... Read Full Answer >>
  3. For what types of accounts are demand deposits available?

    There are essentially three types of accounts available as demand deposits: checking accounts, savings accounts and money ... Read Full Answer >>
  4. What is the difference between disposable and discretionary income?

    According to the Bureau of Economic Analysis, or BEA, disposable income is the amount of money an individual takes home after ... Read Full Answer >>
  5. Under what circumstances would someone enter into a repurchase agreement?

    In finance, a repurchase agreement represents a contract between two parties, where one party sells a security to the other ... Read Full Answer >>
  6. What are the major laws (acts) regulating financial institutions that were created ...

    Presidents George W. Bush and Barack Obama, in conjunction with Congress, signed into law several major legislative responses ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!