Walking a Treasury Tightrope

20-May (The Wall Street Journal) — Investors in U.S. Treasurys stand a good chance of losing money over time. And yet they can’t seem to get enough of Uncle Sam’s paper.

Many money managers aren’t thinking about Treasurys’ low yields or long-term performance. They are rushing in because Treasurys are a safe place to stash cash in the short term. Above, the U.S. Treasury building in Washington.

With the European crisis heating up and concerns about economic growth in the U.S. and China, money once again is pouring into safe U.S. government debt, sending Treasury prices higher and yields, which move in the opposite direction, to near-record lows.

…Over the long term, however, Treasurys pose risks of their own.

The biggest risk, experts say, is a prolonged rise in interest rates, which would reduce prices of existing bonds and produce losses for investors holding Treasurys.

Treasurys pose another big risk: With yields this low, investors could well lose money over time in inflation-adjusted terms.

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PG View: Longer-term yields are already well below the rate of inflation, netting a negative return in real terms.

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