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By Christopher Davis | 06-21-2012 10:00 AM

Brown: Treasuries Safe Haven for Long Term

Fidelity manager Bob Brown says the European financial crisis will take years to resolve and that a continuing flight to quality will allow U.S. government bonds to sustain their value.

Christopher Davis: You mentioned investors seeing cash in terms of just a safe haven, a place to keep their money in turbulent times. And when the market has gotten volatile investors have rushed into U.S. Treasury bonds.

Bob Brown: So if you thought that the 10-year bond was rich at 3% you were wrong; if you thought it was rich at 2% you were wrong. So it's a point well taken.

Davis: If you look at yields, they haven't been this low since the late 1940s, and if you look at what happened after that the next five, 10, and even 30 years, you lost money investing in Treasuries. So are government bonds even safe?

Brown: The answer is yes. I mean, from our perspective the U.S. government debt is safe, and we're quite comfortable with our holdings from that perspective. I think when you start to look at some of the eurozone peripheral countries, we do have a level of concern there, but we are not managing our bond funds today for rising rates anytime soon. So that's the first thing.

The second thing is that I believe that there is global systemic risk that will be with us and be with me for my career. That's not going away.

If you go back to 2008, you had a crisis management team of President George Bush, Treasury secretary Henry Paulson, and Federal Reserve chairman Ben Bernanke, and other members in Washington that used the Troubled Assets-Relief Program, a silver bullet if you will, and the bankruptcy of Lehman and the consolidation of other banking firms. They were able to confine the areas of concern and deal with it. You can debate whether it was right or wrong for the tax payers, but at the end of the day they did deal with it. In my opinion, they eliminated an Armageddon scenario for the U.S. financial system, and they moved forward. And you saw a real return in risk assets in 2009. It's certainly not without its problems as we face at the end of this year, but at the end of the day the U.S. dealt with their great depression.

So if you move that to Europe, and people need to understand that the euro, from a currency perspective is relatively at its infancy stage. It's 1/20th the age of the U.S. dollar, and the U.S. is considered the new world.

Given the economic challenges that Europe is facing and the significant credit events, the structure of the euro is being called out, the monetary union without a fiscal union. You have essentially 17 different economic models based off of one currency, and in periods of significant volatility you get divergence, not convergence. You have significant disparities and competitiveness and differences in unit labor costs, and when this is pegged to a fixed exchange rate there's no release valve from that perspective. You have a monetary union without a federal banking union. These are all significant issues.

We do believe that European leaders are hopeful that there's a greater, more federal Europe. And to do that you may need conditionality and you may have to surrender fiscal authority on some of the peripheral countries, but from our perspective, that's potentially a resolution. But this isn't the silver bullet of TARP and bankrupting a company and have others consolidate. This will take years. And as a result of that that we believe that there will continue to be this flight to quality, the U.S. dollar continues to be the reserve currency, and that Treasuries continue to be a safe haven for that type of volatility. As a result of that we think it's a strong part of a well-diversified portfolio to hold them.

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