Why Investors Should Not Buy Government Bonds

Jared Levy:  When I was a kid, I used to play soccer in the alley behind our house with the neighborhood kids. It was a narrow lane, so we didn’t have much room. And the goals were pretty small, too. We made a rule that we wouldn’t play with goalkeepers. No one would ever score if someone could just stand in front of a two-foot goal.

More often than not, one kid would end up drifting back and standing in front of the tiny goal. Boy would we get mad!

But that kid wasn’t really aware of what he was doing. He knew the rules, he just defensively kept sliding back.

I think investors are starting to do the same thing with government bonds.

Consider this:

Treasuries prices rose on Friday, helped by stock losses, Fed purchases of Treasuries, and relief U.S. inflation data did not come in above forecast.

Government bond yields have been back on the rise… But U.S. Treasuries aren’t the best place to park your money.

A 10-year note will give you 3.187%. It’s true — government bond returns have been climbing from bottom-of-the-barrel lows, but you can still get a better return from other areas in a lot less time.

Of course, investors are willing to pay a lot of money for a small yield if they feel their money is safe from any decline, but even government bonds aren’t safe from drops in value anymore. In the fourth quarter of 2010, U.S. Treasury-issued bonds handed investors a 2.7% loss, and in the first quarter of this year, they added another 0.1% loss to the pile.

U.S. inflation alone could wipe out any gains you might get from investing in Treasury bonds.

So here are three specific areas that will give you a better return than the 10-year Treasury note.

High-Dividend Stocks

Nine out of the top 10 holdings of the PowerShares High-Yield Dividend ETF (NYSE:PEY) have a higher yield than the 10-year Treasury note. The lowest dividend of the bunch is 4% and the highest is 6.8%.

Of these top 10 holdings, there are four companies that have performed well over the past year:

  • CenturyLink, Inc. (NYSE:CTL) — a communications company up 24.29%
  • Altria Group, Inc. (NYSE:MO) — a cigarette company up 26.38%
  • AT&T, Inc. (NYSE:T) — a telecom company up 23.66%
  • Vectren Corp. (NYSE:VVC) — a Midwest utilities company up 17.66%

These four companies have dividends of 6.8%, 5.6%, 5.5% and 4.9% respectively. Not too shabby when you consider that their share prices have been climbing.

Choosing any of these companies would give you an automatic return that’s higher than the 10-year Treasury note… in a single year.

Safe CDs

CDs can have different time frames. Some have a three-month term, and others have a five-year term. Each is different, and each has its own return. They can give investors access to lots of different kinds of investments, from commodities to stocks to currencies.

The flexibility of a CD is very attractive to traditional bond investors, and a special kind of CD offered by EverBank should have you drooling.

It’s called a MarketSafe CD. This kind of CD protects your principal investment. That means you can’t lose money. But the upside potential is much much greater than the 10-year Treasury note yield.

EverBank offers two different MarketSafe CDs — one based on five different metals and the other based on 10 different commodities. They both have a term of five years. And you have to buy in before June 9, 2011.

They are the MarketSafe Diversified Commodities CD and the MarketSafe Timeless Metals CD.

Over the next five years, could commodities lose value? Sure, it’s possible, though not likely. But if they do, then 100% of your investment is protected.

Inflation-Proof Stocks

Another way to beat the tiny 3.187% yield is to invest in inflation-proof stocks. These are companies that can pass their higher costs onto the consumer. That means they are riding the U.S. inflation wave instead of being flattened by it.

This group of companies includes service providers and producers of consumer staples. They also include blue chip companies. Companies like MasterCard (NYSE:MA) and Wal-Mart (NYSE:WMT) and even AT&T (NYSE:T).

Safe Haven Investor editor Kent Lucas had this to say about AT&T in his April issue:

It’s a blue chip name. Research has proven blue chip, or higher quality, larger (capitalization) companies tend to do well in inflationary environments. Blue chip companies are often better run with a competitive advantage and an attractive business model that does relatively well compared to lesser companies…

Simply stated, there is a flight to quality as inflation fears rise.

Combine Strategies

If you can find a company that is an inflation-proof stock and a high-dividend stock, you’re really in the money. AT&T is just such a company. It’s climbed nearly 24% in the past year and offers a 5.5% dividend.

Altria Group is in the same boat, if you don’t have any qualms about investing in a cigarette company.

It’s hard to pass over companies like these for pricey, low-yielding bonds.

The point is, drifting back to bonds, just like that kid in the alley during our neighborhood soccer games, is kind of an unconscious reflex.

U.S. inflation is headed higher this year. Even the Federal Reserve has increased its forecast. That could seriously eat away at the ultra-conservative returns that longer-term bonds offer.

There are a number of different opportunities out there that can give you much better returns than the 10-year note.

P.S. News has just hit the airwaves today that IntercontinentalExchange (NYSE:ICE) and Nasdaq OMX Group (NASDAQ:NDAQ) have taken their bid for NYSE Euronext (NYSE:NYX) off the table. This means a big drop in share prices for NYX. I first told subscribers about this company back in September 2010 at our annual conference, and talked about it again in mid-January 2011. At that time, shares were trading for around $33 a share. On Friday, shares closed at $40.89, but opened about $4 lower on Monday. This action hacks any gains made from mid-January in half, and if you’re using a tight stop-loss, you probably got booted out of your position.

If you weren’t using a stop-loss, now might be the time to get out with some gains. This news may ultimately be good for NYX, but in this topsy-turvy trading environment, it’s best to take gains while you can. Do so with NYX.

Written By Jared Levy For The Taipan Publishing Group

Jared Levy is Co-Editor of Smart Investing Daily, a free e-letter dedicated to guiding investors through the world of finance in order to make smart investing decisions. His passion is teaching the public how to successfully trade and invest while keeping risk low. Jared has spent the past 15 years of his career in the finance and options industry, working as a retail money manager, a floor specialist for Fortune 1000 companies, and most recently a senior derivatives strategist. He was one of the Philadelphia Stock Exchange’s youngest-ever members to become a market maker on three major U.S. exchanges.

Article brought to you by Taipan Publishing Group, www.taipanpublishinggroup.com.

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