Skip to content
Link copied to clipboard

For some, Treasuries still make sense

Should we still buy Treasuries, especially with a Federal Reserve interest-rate hike on the way? For some investors, the answer is yes, says John Donaldson, director of fixed income at Haverford Trust Co. in Radnor.

Should we still buy Treasuries, especially with a Federal Reserve interest-rate hike on the way?

For some investors, the answer is yes, says John Donaldson, director of fixed income at Haverford Trust Co. in Radnor.

After not owning Treasuries for a few years, Donaldson has been a buyer recently, and he says the seven-year maturity in Treasury bonds is a sweet spot. The yield on the seven-year Treasury is 1.94 percent, which is also the average yield for the last 12 months, and better than cash.

"There is no question that the bull market has ended" in Treasuries, Donaldson says. The lowest yield for the seven-year was 0.88 percent in July 2012; the high yield in the intervening years was 2.46 percent.

But a rate hike on the horizon isn't going to blow the bond market, he believes.

"We take exception to the magnitude of the potential downside in an environment of relatively modest growth, relatively benign inflation, and a very gradual Federal Reserve. Forecasts that call for a bond market debacle, catastrophe or disaster are very overstated."

Treasuries remain the asset of choice whenever the market has a "flight to quality" during periods of increased volatility. And there's plenty - Greece, China's stock market rout, and the global commodities crash.

"It's been a few years since we owned Treasuries, and we've added them back into taxable portfolios, and seven years is the optimal point for rolling down the yield curve," he adds.

Donaldson has also been buying seven- and 10-year bonds issued by the pharmacy giant CVS, yielding 3.2 percent and 3.7 percent, respectively. He's avoiding Puerto Rico bonds entirely.

As for Fed Chair Janet Yellen's plans to increase short-term interest rates, he says: "The range of forecasts for FOMC rate hikes is as wide as we have seen in a long time.

"At one extreme, we see calls for no rate hikes until mid-2016 at the earliest. Jim Bianco at Bianco Research and Jeff Gundlach at DoubleLine are the most prominent advocates of that outlook," he says.

Capital Economics in London is "well outside consensus in the opposite direction, predicting a 3 percent funds rate by the end of 2016."

A rate hike of 0.25 percent to 0.5 percent "isn't going to change things all that much. Still, the central bank has never had to move off of zero rates. The Fed wants to be able to observe and measure what happens, and not overdo anything."

Time for goodbye

Three or more dings on your broker's record? Time to move on, says one local plaintiffs attorney.

Witness the demise of J.P. Turner, a brokerage purchased last year by ex-American Realty scion Nicholas Schorsch. He acquired a few brokerage firms, including Cetera, where Schorsch is no longer in the picture.

Cetera shut down J.P. Turner last week. The firm "was viewed as a compliance problem," says local attorney Nick Guiliano, who has filed multiple lawsuits against its brokers.

(You can check your broker's disciplinary record on the Financial Industry Regulatory Authority's brokercheck.finra.org. It's easy and free.)

"Cetera is risk-averse and saw it as a compliance issue. They bought J.P. Turner for distribution for its products, but realized it's too much of a regulatory concern and a liability," Guiliano says. "Brokers with problems went to J.P. Turner. No one else would have them."

Former Cetera broker William Bucci, local to Philadelphia, goes to trial in September.

Last summer, the U.S. attorney for the Eastern District of Pennsylvania indicted Bucci for running an investment-fraud scheme that duped victims, including a Catholic priest, into turning over more than $3.2 million. The indictment charges securities, mail, and mortgage fraud, and filing false federal income-tax returns.

Bucci told his investors he was starting a wine and high-end olive oil import business, and promising 10 percent returns a year.

There never was an olive oil and wine business, and the indictment alleges Bucci used the money to support his lifestyle and to make payments to earlier victims. The indictment says victims entrusted in excess of $3.2 million to Bucci between November 2003 and December 2011.

According to the BrokerCheck site, Bucci had complaints from customers dating way back to 1997. In that complaint, a church alleged Bucci churned its account and cost it $1.4 million. His then-employer, Prudential, settled the matter.

Three or more dings on a broker's record should be a warning to anyone.

Back in 2003, FINRA studied its database of 663,000 or so brokers registered in its system, and 4.9 percent were subject to one or more customer complaints.

Only 0.4 percent had three or more customer complaints.

Red flag? You bet.