FT: University Endowments Dumping US Treasurys

Friday, 10 May 2013 07:55 AM

By Michael Kling

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Smart money has been dumping U.S. Treasurys, according to the Financial Times.

Notably, many university endowments have cut their holdings of Treasury bonds by up to 30 percent, according to the Times. And some have completely eliminated their Treasury holdings.

"Treasurys were a core holding," an unnamed university fund manager told the Times. "Now everyone is holding less than 5 percent."

Editor's Note:
Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Like many investors, endowment managers fear they'll lose money when interest rates rise and prompt the value of Treasury securities to fall. That time will come when the Federal Reserve abandons its lose monetary program.

"If you think you can change allocations quarter by quarter, and you believe rates will be low for longer, and you think you can make a quick switch, and then maybe it is OK," the university fund manager said. "But that isn't the way we invest. Today government bonds should come with a warning about interest rate risk."

Princeton, which as a $17 billion endowment, has switched to cash, the Times reports. Duke has moved from Treasurys to U.S stocks with high dividends and emerging market equities, and Cornell's $5 billion endowment has cut Treasurys to about 3 percent of its holdings.

Treasurys make up only 4 percent of Yale's $19 billion endowment. "Yale is not particularly attracted to fixed-income assets as they have the lowest expected returns of the seven asset classes that make up the endowment," the fund stated in its annual report.

The average university endowment lost 0.3 percent in the fiscal year ended June 2012, according to the Times, citing a survey of 831 universities. The funds gained 19.2 percent on average the previous year.

A blood bath in bond portfolios, especially in Treasurys, prompted by rising interest rates is a common fear. But some observers say that fear is overblown. Unlike in 1994, when markets were caught off guard by rate hikes, the Fed is more open about its intentions and has said it will not raise rates until unemployment falls to 6.5 percent, MarketWatch notes.

The Fed also has more tools available to control long-term rates than it did in 1994. For instance it can adjust the pace and timing of its asset sales or decide not to sell assets on its balance sheet.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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