SUSIE GHARIB: So let’s explore this. How safe or risky are Treasuries?
Joining us now with two different views, Dan Shackelford. He’s portfolio
manager of the T. Rowe Price new income fund — it’s a $15 billion dollar
bond fund– and James Awad, investment strategist at Zephyr Management,
which manages more than 20 investment funds. Jim, Dan, thanks for joining
DAN SHACKELFORD, PORTFOLIO MANAGER, T. ROWE PRICE NEW INCOME FUND:
JAMES AWAD, MANAGING DIRECTOR, ZEPHYR MANAGEMENT: It’s great to be here.
GHARIB: Dan, let me begin with you. Is Warren Buffett right? Are
SHACKELFORD: I don’t want to talk myself out of a job. But Warren
Buffett made a very important point along with the report that you had
earlier and that is basically, the Fed is targeting an inflation rate of
around 2 percent and as we heard earlier, inflation is running a little bit
higher than 2 percent and actually above the current level of interest rate
that you can get on the Treasury 10 year. So once the inflation eclipses
the yield on the Treasury bond, I would say it’s getting pretty risky.
GHARIB: Jim, what do you think? Are Treasuries dangerous?
AWAD: Well, that’s the consensus view and all due respect to Warren
Buffett. he’s a lot richer and smarter than I am. But here’s another
scenario that investors should consider. With all the money that’s been
thrown at the U.S. economy, it’s growing at about half the rate that the
Fed would like it to grow at just as we’re about to have that huge fiscal
drag that Mr. Bernanke was talking about, plus the higher energy prices
tapping consumer purchasing power. Plus you have Europe. At best, it’s
going to be in a mild recession for many years which is a disinflationary
event. And then finally you’re staring down the barrel of a possible
confrontation between Israel and Iran which could affect both the price and
availability of oil, all of which would hurt the world’s economies and take
inflation off the table. And if that happens, I think investors would be
risk adverse and in a risk adverse environment, there’s a place for fixed
income vehicles like Treasuries.
GHARIB: You know, Jim, that whole scenario could change in the blink
of an eye. Interest rates could go up. Inflation could go up and
Treasuries would plummet and investors would lose as Suzanne reported in
her package. Are nervous investors maybe better off just putting their
money in cash or a money market fund?
AWAD: Well I think you should have some in cash, some of the money in
market funds, some in Treasuries, some in corporate bonds which four or
five year corporate bonds you can get 4 percent or so if you do your work
and in a tax-free retirement account, that’s a good return. And then I’m
not saying you shouldn’t own any stocks. I think large cap multinational
stocks and certain emerging market stocks should also be in the package.
I’m just arguing against those who say you should sell all of your
Treasuries or go short Treasuries which some people are doing.
GHARIB: Let me get Dan back in the conversation. Dan, investors have
been hearing for a couple of years now, get out of Treasuries. It’s
dangerous. And yet we’ve seen Treasuries outpace stocks. Could that be
the case again in that the Treasuries would be better than stocks and
investors will make out just fine?
SHACKELFORD: I think Jim outlined the risks pretty well. My point
would be that the probability of those risks, given that they’ve been known
for a while — there could be some surprises in the Middle East, but
otherwise, I think we’ve been dealing with a lot of these problems and I’m
not suggesting that the problems will go away in the U.S. anytime soon. We
at T. Rowe Price would take the view that there probably still is a place
for some Treasury exposure, but in the funds where we have a choice whether
to own Treasuries or play emerging or corporate bonds or high yields, we
would much prefer sectors where investors are getting paid to wait and earn
something at least above the rate of inflation. The other thing I’d like to
point out is that the U.S. economy is still growing at a 1.5 and 2 percent
rate. Maybe that’s lower than it should be and lower than expectations.
But nevertheless, 2 percent inflation at some point, whether 2 percent
potential growth rate, our guess is that Treasury 10 years would now have a
2 handle. should at least have a 3, and long bonds should probably move up
toward 4 percent.
GHARIB: Real quickly, the point that Warren Buffett was making,
you’re really safer with stocks. So my question to both you quickly is,
are you better off putting your money in a Treasury with a 2 percent yield
or in a stock like McDonald’s (NYSE:MCD) that gives 3 percent on its
dividend? Jim, real quickly.
AWAD: I think over the long term, you’ll do better in the stocks than
the Treasury. I’m only making the case that some people may be too bearish
GHARIB: Dan, in a word or two.
SHACKELFORD: In the scenario where we have a blip in the economy, you
certainly would be better served I think to be in dividend paying stocks
that at least have an opportunity to go up in price.
GHARIB: Gentlemen, thank you so much, interesting conversation.
We’ve been speaking with Dan Shackelford. He’s with T. Rowe Price new
income fund and James Awad, investment strategist at Zephyr Management.