The July 25th Marketplace Morning Report on National Public Radio included a segment called Allan Sloan’s lessons on bond investments. Mr. Sloan is a business columnist for the Washington Post who recently wrote that the current Treasury bond market is “out of whack”, and poses a risker investment than the stock markets. Mr. Sloan wrote:
If you’re a retiree of modest means who saved all her life to accumulate a nest egg to buy Treasury securities to supplement Social Security, you’re up a creek. Not only have these low yields hurt savers of modest means, they’ve caused problems for insurance companies, annuity issuers and pension funds, all of which set aside money today to meet needs that will arise in the future.
Add to Mr. Sloan’s list death care trusts, and especially, cemetery care funds and preneed trusts that have historically made current distributions of income. Cemeteries face rising maintenance costs and cremation rates, and have become increasingly dependent upon perpetual care trust income. In states such as Missouri, funeral homes can withdraw income from some of their preneed trusts, and they too face rising cremation rates.
Mr. Sloan suggests that demand, rather than yield, has been driving up the bond market. While the yield on Treasuries has dropped, our bonds are more attractive to investors than those being offered by European counterparts that have a negative yield. Neil Irwin, a columnist for the New York Times, offered a similar analysis in a piece he wrote earlier this month (Can We Ignore the Alarm Bells the Bond Market is Ringing?)
The risk that the columnists refer to is the eventual move the Federal Reserve will make to raise interest rates. While that may not begin to happen until 2017, the slightest of increases will cause ripples for the value of long term Treasuries. Investors (such as perpetual care trusts and preneed trusts) that have opted for those types of Treasuries will be hit the hardest.