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Yoshikami: The Long Bond Disaster

Sunday, 7 Jun 2009 | 7:42 PM ET

Investors are reeling from the latest investment bubble to burst — long-term Treasury bonds. With mutual fund managers and investors absorbing losses of more than 15 percent on supposedly safe assets, this highlights the perils in fear-based investing.

Chasing inflated assets (even Treasury bonds) has it's perils. And there is still plenty of pain
to come for longer term fixed income assets as economies restart after a long and difficult recession.

With oil moving toward $70 a barrel and commodity prices rising, inflation is surely coming. As more green shoots appear, the economic recovery story continues to play out. Gigantic stimulus packages around the world are lubricating economic systems and will result in higher growth rates. These factors all will contribute to a rise in interest rates as inflation accelerates.

It's a simple equation. As interest rates rise, bond prices fall. And that fall will be even more dramatic when the Federal Reserve stops buying fixed income assets as they attempt to keep interest rates artificially low. Officials are already beginning to sound the alarm that intervention by the Fed will not be permanent. When Fed buying goes away, interest rates will rise.

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The bottom line — avoid long term fixed income because interest rates are going up. Stay short term in your bond portfolio. Diversify into corporate assets. Invest in TIPS. And don't bank on the belief that Treasury assets are safe in all ways. They may have safety from a default perspective, but capital value fluctuation is another thing entirely.

Having patience in an investment strategy sometimes means waiting for opportunities even if the current returns are low. After two difficult years in the investment world, the last this you need is another asset losing capital value, especially your fixed income.

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Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). Michael oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.

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