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It has long been a truism of investing: When stocks go haywire, when economic terror fills the streets, when a broad market index like the S&P 500 jumps more erratically than a grasshopper on speed, investors flee to the "safety" of government bonds. For decades, after all, Uncle Sam's promissory notes have been the ultimate ballast for stock market volatility: the somewhat boring but steady companion for tens of millions of investors around the world.
Well, as many investors are discovering, Steady Eddie just joined the Hell's Angels. During one 10-week stretch ended this fall, the price on the 30-year Treasury bond soared 28 percent, plunging yields to 2.7 percent. (Prices move opposite yields.) "It was one for the record books," says Jim Swanson, chief investment strategist for MFS Investment Management. Yields on longer-dated Treasurys have moved this dramatically in just six monthly periods over the past 20 years, according to Barclay's -- and two of those were during the financial crisis of 2008. In recent months, in fact, the standard deviation of long Treasury bond funds -- a common measure of volatility -- has nearly doubled its historical average, according to Lipper. And experts believe the road will stay rocky for some time. "These bouts of volatility seem to be becoming more frequent," says Anthony Valeri, a bond strategist at LPL Financial. "And we think it'll stick around."
Fear of the debt crisis in Europe -- as well as a number of interest-rate-stemming actions taken by the Federal Reserve of late -- have helped to create this "new normal," say experts. What does this mean for investors who have long counted on Treasurys to stabilize their portfolios? That, says William Larkin, fixed-income portfolio manager for Cabot Money Management, is being asked by many these days. Larkin says those holding bond funds with longer-dated Treasurys are likely to endure volatility for a while. (Investors can lose money in bond mutual funds, which do fluctuate in price.) But those who buy individual government bonds and hold them to maturity won't have to worry about price fluctuations. Barring a major catastrophe, such investors will get their principal back when the bonds mature and collect interest payments -- however paltry -- along the way.
To avoid the most swings, experts say, stick to shorter-term individual bonds and funds. These days, Larkin and others prefer bonds maturing in three to seven years. Says Sarah M. Place, CEO of Place Trade, a brokerage firm: "There's a point where a little bit of extra return isn't worth the 10 or 15 years you'll have your money tied up."
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