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What went down must come up

By Jennie L. Phipps ·
Wednesday, January 18, 2012
Posted: 3 pm ET

A few years ago, cautious investors living in retirement put their savings in long-term U.S. bonds and happily collected 6 percent. Today, that isn't much of an option because rates are below 2 percent. Even conservative investors like my CPA husband can't find much good to say about that rate of return -- no matter how safe it makes him feel.

Financial software developer and retirement planning expert Doug Carey, who blogs at My Wealth Trace, goes a step further and urges investors to avoid government bonds, predicting that interest rates are as low as they can go and will almost certainly rise. He points out that if you own a 10-year Treasury bond and interest rates do go up, you will take a bath. Here's why that's likely:

From 1971 until 2012, the yield on 10-year Treasuries averaged 7.15 percent, reaching a historical high of 15.84 percent in September of 1981 and a record low of 1.83 percent in September of 2011. If bonds return to the mid-4 percents, where they were in the early 2000s, investors holding 10-year Treasuries would see a 32 percent loss on bonds they buy at today's low rates. For those investing today in 30-year Treasury bonds, this scenario would produce about a 45 percent loss, Carey points out.

There are those Chicken Littles who believe that yields on U.S. debt will rise a lot more because our country's debt is higher than U.S. gross domestic product, or GDP, but Carey isn't making those kinds of dire predictions. Instead, he urges those people who are determined to put their money in Treasuries to stick to short-term bonds, so when interest rates do rise, they won't be locked into long-term short rates.

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