In March of 2006, headline or nominal inflation is running over 4.0% year over year. The 10 year US Treasury has a yield of about 4.80%. So, you are locking in a return of 0.8% for 10 years. I agree with Lynn that this seems low.
When yields go up, the price of bonds go down. So, when you feel that interest rates are more likely to go up than down, bonds are a less attractive place to invest. You can minimize the risk of loss in your bond portfolio by shortening the maturity of the bonds you hold or by raising the coupon level of the bonds you hold. Both actions reduce the sensitivity of bonds to changes in interest rates.
If you are sure inflation and interest rates are going up, many investors find cash an attractive place to invest. By keeping maturities short, one or two months, you can reinvest your capital at increasingly better yields.
You state that many investors find cash to be an attractive place to invest in times of escalating interest rates and inflation. By "cash" are you referring to "near-cash money-market securities," vs. bonds (or stocks)? I'm sure you would agree that in periods of inflation and escalating interest rates, cash itself is not only a non-earning asset, it is also a wasting asset.
Posted by: Bob Hansell | March 14, 2006 6:42 AM | Permalink to Comment