Thursday, January 31, 2013

Investment In Long-term Treasury Bills

Now Remember the saying that those who do not read history are doomed to repeat it. Fortunately, some of you who read this article will recognize that your investment in long-term treasury bills can become your personal blind spot, even your personal million dollar blind spot for wealthier readers.

Consider the parable of the frog which falls in the pot of water, whose water is slowed raised until it boils and the frog become part of soup.

Just like the frog gradually boiled as the water slowly and consistently got hotter, longer-term supposedly safe treasury bills with minimal interest rates can generate huge personal losses, when rates turn up again. Historically periods of sustained low-interest rate on bonds like we now are experiencing, are followed by period of rising interest rates with dramatic increases in interest rates.

Check out the logic of my statement by performing a Google search with the phrase-bond losses 1994. The results will show headlines like: the great bond massacre, 1994 bond market crash, bond market disasters.

Basically, financial blood ran in the streets for bond holders who had to sell bonds in 1994.

Most people do not appreciate that a rise in interest rates means a drop in the value of long-term bonds which are yielding prior lower interest rates. The longer the remaining maturity of bonds, at a time when interest rates rise, the higher the loss can be on the bond.

Rather than be unpleasantly surprised from hindsight, do some more research to understand better how experts warned you and rather than not see or ignore this Treasury bill blind spot.

The professionals recognize the 800 pound gorilla issue of bond interest rates versus maturity. They employ strategies which keep their investments in shorter-term maturities and ongoing monitoring of longer-term maturity bonds to see when to get out of the market.
In essence, they are exploiting their understanding of this million dollar blind spot which you may not see or choose not to see. Appreciate why the professionals do that and apply that insight appropriately for your personal situation.

The analogy of this situation is that most people in America are actually on a fiscal slope and do not notice the decline until it is too late. It is not the cliff we have to worry about because that is sudden death . It is the slope and the hemorrhaging of personal equity that creates real urgency to examine our blind spots.

Whether this analogy seems most appropriate to you in your personal life or your business, recognize the risk exists, determine how the risk occurring would impact you, and then monitor it appropriately.

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