Historically, U.S. Treasury bonds have been the most effective hedge against sharp stock market losses.  The starkest example of this occurred during the Great Depression, when $1 invested in risky small company stocks turned into ten cents.  U.S. Treasury bonds, however, not only maintained their value but increased a cumulative 20%.

Having a portfolio asset which is maintaining, if not improving, in value during such extreme and difficult periods helps investors avoid one of the biggest, yet most common, mistakes:  giving up on stocks and selling when prices are down.  No investment has offered this protection better than U.S. Treasuries, and nothing appears safer today.

During the more recent global financial crisis, U.S. Treasury bonds yet again protected portfolios very well.  While stocks around the globe fell 40% to 50% in 2008, intermediate-term Treasuries returned 11%.  Other bond instruments did not fare as well:  on average, corporate bonds fell 5% and higher-yielding bonds lost 26%.  During times of such extreme market distress, the value of truly safe assets cannot be overstated.

Despite legitimate and growing concern over our country’s financial condition, recent examples continue to illustrate the role U.S. Treasuries play as the ballast of a well-diversified portfolio:

In the late spring and early summer of 2010, considerable fears of an economic slowdown gripped the markets.   From late April to early July, a period which included the unsettling May 6 “Flash Crash”, the S&P 500 fell 16%.  And Treasuries?  Intermediate-term Treasury bonds gained close to 5%.

Tragedy in Japan in early March 2011 prompted heavy selling in stock markets around the world.  In just three trading days, the U.S. stock market shed nearly 4% of its value.  Investors began dumping other asset classes, too—commodities, corporate bonds, even gold, all fell.  Treasury bonds held their value, rising by 1%.

Let’s not forget the United States remains the world’s premier economic power.  Our economy is 2 ½ times the size of our nearest competitor and is still the most productive and diversified in the world.  Moreover, global investors continue to look to the U.S. dollar for liquidity and stability—roughly two-thirds of the world’s currency reserves remain denominated in U.S. dollars.