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US Treasuries May Be All You Need
That is the recommendation from Ronald Ryan, president
of Ryan Labs in New York. He noted “an amazing consistent
lack of any excess return for any investment grade sector
away from Treasuries,” including agencies, corporates and
mortgages.
Treasuries are regarded and the most liquid and highest
credit instruments in the marketplace, Ryan said. As his
index – the Ryan Labs Treasury Index- has shown, US
Treasuries have outperformed agencies and corporates for
the last seven years and mortgages for the last 10 years.
As a result, Ryan said “such consistent performance should
be honored as the core asset for fixed income portfolios.”
“If you can’t outperform Treasuries, one would assume your
value added is a negative. Moreover, why diversify
away from the most liquid, creditworthy securities if you
are not rewarded consistently enough to do so?” Ryan said.
Ryan argues that contrary to popular belief, yields are not
returns, but prices. When calculating the total return of
any security, investors need to know beginning price,
ending price and all cash flows in between.
“Just because Treasuries have lower prices doesn’t mean they have lower returns,’ according to Ryan. To the contrary, in the last seven years Treasuries (as measured by the Ryan Labs Treasury Index) have returned 6.60%, which is better than the Lehman Brothers Agency and Corporate Indexes which returned 6.63% and 6.53% respectively. The Lehman Brothers Mortgage Index returned 7% for the same seven-year period.
Treasury Maturities “Sacred Ground”
Ryan makes the case that Treasuries are “sacred” and that
the US Treasury is doing investors a great disservice by
dismantling the Treasury maturity ladder. Eliminating
maturities will have a “severe” ripple effect on pension
funds since it will eliminate a key tool needed for
matching assets and liabilities.
In order for pension funds to match these liabilities, they
have traditionally relied on a wide assortment of Treasury
maturities. But because the US Government thinks it has
reduced the national debt, many bonds are no longer being
issued.
Ryan said the US Treasury has already stopped issuing
the 3-, 4-, 7-, 10- and 30-year US Treasury bonds and this
violates the “sacred ground” of the yield curve, which will
eliminate a basic asset-liability management tool for no
reason.
“We need every one of these spots on the yield curve, so we
can make comparisons and prices for every time
period. There are going to be many problems when
these are eliminated,” Ryan warned.
One reason why Treasuries do not have a more prominent role
in portfolios is that no one gets paid to sell them, other
money managers said. One fixed income trader said he has
seen a push towards adopting a swaps curve which is coming
at the expense of longer dated Treasuries that are
being eliminated.
Ryan, who as the former head of fixed income research at
Lehman Brothers helped create many bond indexes, started
his own independent firm, Ryan Labs, in 1982. The Ryan Labs
Treasury Index, created in 1983, is a market-weighted index
of all Treasuries longer than one year to maturity.