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Treasury Bond Investment Strategy

August 16, 2012

Treasury bonds are absolutely risk-free from default.  However, there is a time risk if the bonds need to be sold prior to maturity.  If market desired yields rise above the coupon percent, and the bond needs to be liquidated, it will have to be sold at a loss.  If desired yields drop below the coupon percent, the market value will increase.  Right now, many Treasury bond coupons are significantly greater than the market rates causing significant increases in the market values of many Treasury bonds.  Here is a strategy that can possibly increase your wealth and cash flow.

 

Sell the Treasuries that have large increases in value – some as much as 30% to 40%.  Reinvest the proceeds in longer-term corporate bonds. This will capture the gains, increase your portfolio’s bond face values and in many cases increase your cash flow from the coupons.  The trade off is at greater default risk since the corporate bonds are not as secure as the Treasuries, and a lengthening of the maturities of your bond portfolio.  Work out the numbers, and then decide.

 

The above is presented for informational and educational purposes and should not be construed as a recommendation.

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