Long-term Treasury bonds are a classic income play. They offer scant default risk and excellent liquidity. Yields, currently around 2%, are respectable in today's environment, and the interest is exempt from state and local income tax.

Those aren't the only reasons to hold them, though. "Treasury bonds historically have done well as safe haven assets during times of chaos," says Janet Briaud, chief investment officer and managing partner at fee-only firm Briaud Financial Advisors in College Station, Texas. "That is another compelling reason to have some in a portfolio." Indeed, when stocks collapsed in 2008, Morningstar's long government bond category returned almost 28%.


Briaud says long-term Treasuries make sense now. "We have witnessed over a decade of deflation in Japan and now Europe has had deflation of -.1%," she points out. "Most pundits are worried about rising interest rates, but historically, rates have moved higher when inflation was a concern. Today, with low velocity of money and wage increases below inflation for the majority of the population, deflation is definitely a risk. Indeed, we have seen the first year-over-year deflation in the U.S." Continued low inflation or deflation would bolster Treasuries, according to Briaud.

Can interest rates on Treasuries go even lower, bolstering their trading prices? "Absolutely," says Briaud. Especially when you consider the 10-year government bond yields in the U.S., compared with those in other countries: about 0.5% in Japan, about 0.3% in Germany, and in the U.S., about 2%. "With the dollar gaining in value, it is reasonable to believe that foreigners will buy our bonds," says Briaud. "That should provide appreciation as well as income." 

At Briaud's firm, clients' portfolios have an allocation to Treasuries of approximately 25%. "When Treasuries rallied strongly in 2011, we reduced our position by about 50%," she says. "We have slowly added to the position since then and we are now fully allocated."


At fee-only firm Bedrock Capital Management in Los Altos, Calif., most clients have a 5%-10% allocation to long-term Treasuries through a mutual fund, according to portfolio manager Tony Blagrove. He likes long-term Treasuries for several reasons, he says.

"Reason number one is to serve as a counterweight to a weak economy and a declining stock market," Blagrove explains. "To us, the counterweight characteristic is the most compelling reason for owning Treasuries in our clients' portfolios."

Blagrove adds that during each recessionary period since 1950, stocks have lost an average of 6% while bonds have gained an average of 13%. "This is where longer-term Treasuries fit into our clients' portfolios," he says, noting that his firm also holds long-term corporate bonds for this purpose. Blagrove also appreciates long-term Treasuries for their addition to portfolio stability and, of course, for their predictable cash flows.

Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.

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