Bonds Are a 'Safe' Investment: A Big Lie Gets Even Bigger

bondsIt's happening again.

About a month ago, bemused investors awoke to news that over in Germany, the government had just sold $5 billion worth of Eurobonds that paid an average interest rate of -- get this -- negative 0.0122%.

In other words, if you bought one of these bonds for 100.01 euros, in six months you return it to the government and get back 100 euros.

While we've seen this happen in other "safe haven" countries -- Switzerland and the Netherlands -- this was the first time it had happened in Germany. For many bond investors, it won't be the last.

The Trouble with Europe (but Not Only Europe)

Here's the problem. In the bond secondary market (fancy industry-speak for people reselling bonds that the government has already issued), some bonds backed by governments deemed unlikely to go bankrupt have traded at negative yields on several occasions in recent months. Yields on already-issued three-month U.S. Treasury bonds were briefly negative back in October.

In early February, Barron's reported that the U.S. Treasury is pondering the next logical step: selling bonds that pay negative interest from the get-go. And why shouldn't they? When similar bonds are already changing hands at negative yield on the secondary market, it's clear that people are willing to accept negative interest for the perceived safety of investing in T-bills.

Why should government "leave money on the table?" If bond buyers will pay up for the privilege of owning a U.S. bond, maybe Washington could get a taste of this free-money action, too?

Gimme All Your Money. Now ... Pay Me to Take It

But isn't this, well, crazy? I mean, if Uncle Sam can convince people to lend him money, and to pay for the privilege -- good for him. And three cheers for the good ol' U.S. of A. If investors are so sure we will repay our debts that they'll accept a small loss on their investment for the surety they'll get most of their money back, we must be doing something right.

But is investing in Treasury bonds the right decision for individual investors? Probably not.

Why You Should Put Bond Buying on the Back Burner

Given a choice between buying "risky" stocks and "safe" bonds, bonds naturally attract investors who are reluctant to "gamble" with their savings. That thinking can get you into hot water.

• Rising risks: As thousands (millions?) of folks who bought Greek government bonds learned last year, bonds aren't really risk-free after all. The further in debt a government gets, the higher the odds that it won't repay its debts. And the higher the odds a government won't pay its debts, the less valuable its bonds become.

In Greece's case, the government is trying to hammer out a deal that would involve at least a 50% writedown in bond values, and there's no law that says it couldn't happen here, too. Greece got in trouble because it allowed its government debt to rise to 160% of GDP. America, which had a debt-to-GDP ratio of less than 60% as recently as 2000, recently topped 100%. In short: We're not standing in Greece's galoshes just yet, but we're close.

• Rising inflation: Rising inflation can steadily eat away at the value of investors' bond holdings. Consider that if a bond you buy pays negative interest, or zero interest -- or even 1%, 2%, or 3% -- there's a good chance that rising inflation will eat up any profits the interest might have earned you, leaving you with a loss.

Sure, some investors dodge this risk by buying "Treasury Inflation-Protected Securities," bonds whose value rises automatically to match the inflation rate. The catch: Many TIPS are already trading for negative real interest rates. (You just can't win.)

With Rates Like This, Who Needs Risk?

My No. 1 objection to buying bonds, though, is the obvious one. Default may or may not happen. Inflation may or may not be severe. If it was just these risks to worry about, I can understand why someone might gamble on a bond bet. But why in heaven's name would anyone make a deal that guarantees they lose money?

Because that's exactly what you're doing when you buy a bond paying a negative interest rate. No ambiguity.

Okay, yes. If you're a big company like Apple, with tens of billions in cash that you need to stash somewhere, you may prefer the relative safety and liquidity of bonds -- even ones paying negative interest -- to the risk of putting your cash in a bank that could go belly-up, with no FDIC insurance to save you. And mutual funds and pension funds may be required by their corporate charters to keep their money in short-term bonds.

For the rest of us, rather than buy bonds, the smarter move is to put your money in dividend-paying stocks like Intel (INTC) or Microsoft (MSFT) or any number of the stalwart blue chips that, unlike the Treasury, pay real money in the form of dividends (2.7% for Microsoft, 3.2% for Intel). There's another way such stocks are unlike the U.S. government: They're not mired in debt, but flush with cash. I'll take these kinds of "risky" investments any day of the week.

Motley Fool contributor Rich Smith does not own shares of any company mentioned above. The Motley Fool owns shares of Microsoft and Intel. Motley Fool newsletter services have recommended buying shares of Intel and Microsoft, as well as creating a bull call spread position in Microsoft.

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truth 1st

They breath there for they're owed. See what socialism gets you? Federalism has been destroyed by libtardism. Let fed default and fade away. We have 50 state govts to do the job and defense can be handled via treaty between states same as we do now for North America with Canada.

February 15 2012 at 11:08 PM Report abuse rate up rate down Reply
truth 1st

Congress has long made itself above the laws they pass for us. There is no chance these leaches will ever be honest. Time to let the fed govt default and fade away. There are 50 states fully able to do the governing with out the blood suking political class at the fed.

February 15 2012 at 11:07 PM Report abuse rate up rate down Reply
truth 1st

Fiat banksters around the world are being rejected by the masses. We are mad as hel and we are NOT paying them any more. You can get on board and exchange your fake paper money for real gold/silver money or be left holding wheel barrows of worthless bankster paper, your choice

February 15 2012 at 11:04 PM Report abuse rate up rate down Reply
truth 1st

Fed res dollar printing has increased to keep up with US treasury's need of them as debt buyer of last resort. Euro is doing same for their debt but doesn't hold the luxury as world's res currency. Fed exports inflation to the world, Euro can't & WILL hyper inflate to ZERO. Europe WILL run to the dollar as others trade for gld/slvr. Even with a small demand increase gld/slvr price WILL rise outside the fed's ability to keep suppressed & dollar WILL start its final fall, world WILL panic & gld/slvr will BE the only reserve currency, again. World fiat system is collapsing & we face deep depression. Got Gold? China & India does, why's that you figure?

February 15 2012 at 11:04 PM Report abuse rate up rate down Reply
truth 1st

FBI has officially declared gold owners terrorists. Big fed gov’t has discovered that if we the people chose to go back to real money ( gold/silver ) and/or barter they’re history. We allow the fed to exist and they don’t like it. Help fire the fed leaches and start using real money as much as you can. Your local coin dealer has coins for you to exchange your fed res notes. I use silver eagles for services and even gasoline at my favorite mom and pop stores. The gas station owner loves to sell me a tank of gas for 1 silver eagle at face value of 1 dollar and then selling that dollar 40 or so fed res notes. This shows his taxable income on the sale of the gasoline as a -39 dollars ( loss ) and offsets his tax liability by reducing his reg sales profits. If you make the effort most service providers love it. It also reduces your sales taxes to the face value of 1 dollar, its sooo cool!

February 15 2012 at 11:04 PM Report abuse rate up rate down Reply

Bonds safe? Not if they're General Motors bonds.

February 13 2012 at 8:34 AM Report abuse +1 rate up rate down Reply
1 reply to rgrsjolly's comment
truth 1st

ocommy there is nothing safe but gold/silver/lead

February 15 2012 at 11:06 PM Report abuse rate up rate down Reply

Why wouldn't I just take 100.01 euros and stick them in my mattress? That way I would have 100.01 euros and not 100.00

February 12 2012 at 10:40 PM Report abuse rate up rate down Reply
Vacuum Trucks

I hope you all know that who ever gets to be president its not going to change over night we are in a Bad Economy problem and its not going to be good over the next few years who ever is president. The housing market is dead and stinking, If you want to buy a home now is the best time to buy . if you want a better job forget it. all we can do is hope for the best and expect the worse. I hope and pray it changes but the out look is not good.

February 12 2012 at 9:25 PM Report abuse +2 rate up rate down Reply
2 replies to Vacuum Trucks's comment


February 12 2012 at 10:14 PM Report abuse +2 rate up rate down Reply

So your expectations are? See ya.

February 13 2012 at 12:34 AM Report abuse +1 rate up rate down Reply

It is called a jew bond. Since it steals from you.

I buy lead bonds-since they can stop the jew from stealing from us.

Mike Young

February 12 2012 at 7:22 PM Report abuse -1 rate up rate down Reply

n1yearocraplef...Thanks for your input...Now, go to your room and surf anti-race websites...Trust me, we get your opinion...Most educated people only have to state an opinion once...Small children tend to repeat the same thing over and over...Just as you have been indoctrinated to hate President Obama, we choose to discuss bonds...Something you seem to know absolutely nothing about...Education is a powerful tool...You should try it...

February 12 2012 at 5:25 PM Report abuse -1 rate up rate down Reply
2 replies to jmstrdvnt's comment

shove your bonds n obamy up your arse ~~thank god theirs only 9 months of *hell* left n the american people will be finally freed from the *black cloud* over america ~~2012 will be the *correction election* n thats the only tool america has to know right now. ! !

February 12 2012 at 5:35 PM Report abuse +3 rate up rate down Reply

these free style boards gave been explained to you and yours over and over so either play with what's currently posted,ignore 1year mike,setanta,savmnycountry, etc in or go back to your own private klub where patting eaxh other on the back for your so superier intellect and pundits goes on and facts remain excluded.

February 12 2012 at 8:35 PM Report abuse -1 rate up rate down Reply