Rivelle on the Risks of Government Securities

Two-year Treasuries are still less than 1% from a yield standpoint, and even 10-year Treasuries, though they have sold off and therefore have risen in yield substantially in recent weeks, are still only about 3.5% when you factor in the possibility or the potentiality of inflation going back to even long-term norms in this country.

Assuming that we don't even get a full measure of inflation from this, the 10-year Treasury is still too low from a yield standpoint, and therefore too high from a pricing standpoint.

Herbst: And if those prices are too high and they might fall, that could pose a serious risk to investors heavily invested in Treasuries, correct?

Rivelle: Yes. I think that one of the dangers that fixed-income investors--or one of the conceptual traps that fixed-income investors sometimes fall into is this conflation of the idea that Treasuries: high-quality, low-risk. That is not necessarily the case. The risk of a Treasury when it is yielding next to nothing is actually significantly elevated in a sense that it has got nowhere to go but lower from a pricing standpoint.

Conversely, even though the experience of 2008 might suggest otherwise, is the conflation of the idea that corporate bonds, high-yield, lower-rated securities are somehow inherently riskier is not necessarily the case when they are priced at levels that have already discounted such an abundance of bad news, if I could put it that way, that in a sense they almost have nowhere to go but up from a pricing standpoint.