Monday, January 11, 2010

The Worrisome Nature of Less Risk

Ask any Boomer of a certain age what the meaning of life is and they will probably say retirement. So, if retirement is the goal, why would you handicap your chances of arriving when you imagined? Evidence of this shift has challenged those imaginations: Year-to-date (third quarter 2009), the US household sector is shown to have purchased $529 billion of US treasuries. Granted, a great deal of this was due to money flowing into more conservative 401(k) investments via mutual funds. This pace, the purchase of approximately 45% of what the Treasury was selling, is four times that of the previous year.

This sort of immunization has not gone unnoticed. The problem with many of these commitments to a more conservative approach may be creating a bubble of their own. These types of debt instruments are based on price and yield. As one goes up, the other goes down. The more someone is likely to pay for a bond, the lower the yield that is offered.

If this sort of pace continues, and it looks as if it may as the temptation to be able to even consider retirement strengthens as the economy gradually improves.

But with more people flocking towards these fixed income investments, the price paid will begin to become unattractive, in large part because inflation remains benign. That won’t last forever. And when those conservative investors begin to realize that the yield is now negative to inflation, the selling will begin.

The real paradox will then kick in. Now what?

Paul Petillo is the Managing Editor of and a fellow Boomer.

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