Among the categories of bond funds tracked by Morningstar Inc., Chicago, those holding long-term Treasuries had the best performance for the 10 years through mid-2002, returning nearly 7.5 percent a year.
However, if you adjust for risk, you probably would get a much different answer because long Treasury funds are so volatile. With these funds you might get a return that’s in the 98th percentile (bottom 2 percent) of mutual funds one year, the first percentile the next, then the 98th percentile, the 8th percentile, and so on.
Such unpredictability is crucial because liquidity is a prime reason for investing in a Treasury fund. Investors want access to the money if they need to take it out. With a long Treasury fund, there’s a 50-50 chance they’ll be selling at the bottom, if they need the money.
A forced sale at the bottom could well generate unfortunate results: with long Treasuries, investors might see negative returns. Treasuries with the longest maturities now yield around 5.5 percent. If those yields go up to 6 percent or 6.5 percent, prices could drop dramatically. The price drop could exceed your interest income, resulting in a negative total return.
Therefore, you might be better off with a fund that buys short- or intermediate-term Treasuries, where you’ll have less year-to-year volatility.
