Even People Hiding in a Safe House Keep One Eye on the Exit

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View from the Observation Deck

The bull market in Treasuries has lasted three decades, but even bull markets experience down years. And at some point, they end altogether.
From 1981-2010, there were 13 years in which the price-only return on Intermediate Treasuries (see chart) ended a calendar year in negative territory.
While Treasuries have provided investors throughout time with the optimum protection against credit risk, they have always been vulnerable to interest rate risk.
What makes today's climate tenuous is that interest rates are at historically low levels. The yield on the 10-year T-Note stood at 2.40% on 10/27/11.
Our concern is that many investors have funneled a considerable amount of capital into Treasuries because they viewed them as a safe haven.
The turmoil surrounding the debt crisis in the European Union, particularly in Greece, certainly warranted such consideration.
But the news in Europe changed in a meaningful way on 10/27 due to an agreement forged by EU leaders, banks and the International Monetary Fund.
So the question facing investors in Treasuries is as follows: Where does my risk lie now? We believe the risk lies in the potential for rising rates.
Based on the 2.5% annualized GDP growth rate for Q3'11, we believe that some investors may find greater value in equities moving forward. In other words: "risk-on."
The P/E equivalent on the 10-year T-Note is currently around 40 to 1, and, while Treasuries provide principal protection if held to maturity, they offer zero growth potential.
The forward-looking P/E on the S&P 500 is currently 12.9, according to Bloomberg. The 2012 estimated earnings growth rate for the index is 12%, according to S&P.

Posted on Friday, October 28, 2011 @ 8:02 AM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.