The Economist recently published an article
debunking the already well-debunked myth that U.S. Treasury bonds are
risk-free (see Problem 22 in Chapter 10). While we expect that many
people are not aware that Treasury bonds have inflation, or purchasing
power risk, we hope that by now you do. It is well-known that there is
no true risk-free asset, but Treasuries are used as a proxy for the
risk-free rate. What is really disappointing is the time value of money
skills displayed by the author. The article notes that the real return
in Treasury bonds was a loss of about 2 percent per year, for a
cumulative purchasing power loss of 91 percent for the period 1946-1981.
And of course, this got us fact checking. Based on the returns reported
by Ibbotson, an investor in long-term Treasury bonds would have earned a
nominal return of 2.35 percent over this 35-year period, while
inflation averaged 4.90 percent per year. This gives a real return of
-2.43 percent per year, which results in a cumulative real loss of 57.76
percent. Pretty bad, but not even close to the 91 percent reported.
We
would also like to point out dangers in any article that chooses a
specific period from a longer dataset. If the investor has stayed in the
market for the period 1982-1991, the average real return on Treasuries
was 12 percent per year for this period. So, over the entire 45-year
period, the real return for Treasury bond investors was .78 percent per
year.
