Investors are buying more government bonds right now than at any time in the last year…

Should you join them?

“Bonds drew in money for the 26th straight week,” Reuters reported last week, “as investors hungry to earn a return rushed into U.S. Treasury funds, which enjoyed their biggest inflows in 62 weeks.”

Before you follow the crowd and rush into government bonds, consider this…

Government bonds around the world pay next to nothing.

If you lend your money to the Japanese government for the next 10 years, you will earn literally nothing. In Switzerland, the story is even worse. Take a look…

Who wants to earn zero percent for 10 years?

In college, I was taught that government bonds in developed countries – particularly the U.S. – are safe, and should be thought of as having a “risk free” rate of interest.

We were taught that all other interest rates should be based on this rate… and that in exchange for increased risk, other rates should be somewhat higher than the risk-free government bond rate.

(Your 30-year mortgage rate is a good example. Its rate is usually a percentage point or two higher than the 30-year government bond rate.)

“Hmmm,” I thought, sitting in the classroom… “Is this really true? Is a government bond really risk-free?” The lesson didn’t sit well with me, but I accepted it as the way things are in finance.

Today, you have to wonder how risk-free a government bond really is. It comes down to some simple math…

The U.S. government is in debt for roughly $20 trillion dollars. And America has about 125 million households. If you divide one number by the other, you can see that the government owes $160,000 per household. (Of course, it’s not the government that’s going to pay that… It’s you and me.)

It’s hard to call something “risk free” that has racked up $160,000 in debt for every household in America.

Japan’s government, which pays essentially no interest on its bonds, owes even more than the U.S. – around $185,000 per household.

So, will buying a Japanese or U.S. government bond truly deliver a risk-free return?

“The risk-free return in government bonds could turn out to be a return-free risk,” legendary investor Jim Grant has said many times over the years.

When I read those words for the first time many years ago, I thought, “Wow, that thought couldn’t have been expressed any better.”

Jim is probably the biggest legend and the most respected guy in the investment newsletter business. (He’s humble, too… He won’t take credit for the phrase “return-free risk,” but he doesn’t know where he heard it first.)

I was fortunate to have a private dinner with Jim, Bill Bonner, Porter Stansberry, and a couple other folks not long ago. I was intimidated by the brainpower in the room, and the knowledge of history. And I loved every minute of it.

Jim has got it right. You need to change your thinking about government bonds…

For decades, government bonds have had a reputation for risk-free return. But today, the story is different…

Governments owe trillions of dollars. And they pay next to nothing in interest. So stop thinking of government bonds as delivering a risk-free return…

You should think of government bonds today as “return-free risk.” Then, you should reassess exactly how much of that return-free risk you want to own in your portfolio.

Good investing,

Steve

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Source: Daily Wealth