A note from my friend Doug Behnfield, Boulder-based financial advisor, explains why he has been so keen on Treasury strips:
“[A recent article in the Wall Street Journal discussed] the performance year to date on long dated 0% Coupon Treasury Bonds. My favorite, the August 3039 Principle Strip is up about 39% YTD. That compares to gold up 31%. The yield to maturity on that issue is currently 3.65%. As an aside, gains on gold do not receive long term capital gain tax treatment and Treasury Strips do. Only the accrued interest is subject to federal tax in taxable accounts. In addition, the gain amount that you see on your statement in taxable accounts does not include that interest. As a result, the total return in taxable accounts must be calculated by adding the phantom income back in for the holding period. IRA accounts do not adjust the cost basis up for Strips, so the gain percentage on IRA statements reflects the total return. That is somewhat confusing, so please call if you would like a more in depth explanation.
“David Rosenberg stated yesterday in his letter that based on the current interest rate on the 10 year Treasury (1.99%) and the expressed desire on the part of the FED to flatten the yield curve, the target for the very long term bonds is between 2% and 2.25%. Explicit in that projection is the very high likelihood that we are re-entering into a recession. If this were to occur, (a drop in rates exceeding 1%) the long strip would appreciate more than 40% from current levels. For these reasons, I recommend that we hold onto our Treasury Strips a bit longer.”