Jul 28, 2010
Q & A
Does the deteriorating financial condition of the U.S. government diminish the appeal of U.S. Treasury securities as a risk-free asset? Should investors consider adding government securities from other countries to diversify?
EFF/KRF: TIPS aside, U.S. Treasury bonds and the government bonds of other countries are not now and never have been risk-free since they are subject to inflation risk. Given the current borrowing binges of governments, the temptation down the road to use inflation to kill the value of these nominal promises will be strong. But if the market is efficient, compensation for inflation risk should be built into the prices and expected return of nominal bonds.If inflation risk is an overriding consideration in your fixed income investments, you should probably consider TIPS. Though TIPS do not have inflation risk, they do have some real return risk. (See our earlier post on TIPS.)
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ABOUT FAMA AND FRENCH
Eugene F. Fama
The Robert R.
McCormick Distinguished
Service Professor of
Finance at the University
of Chicago Booth School
of Business
Kenneth R. French
The Carl E. and Catherine
M. Heidt Professor of
Finance at the Tuck
School of Business at
Dartmouth College
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Dimensional Fund Advisors Ltd. is authorised and regulated in the United Kingdom by the Financial Services Authority (FRN: 150100), is registered in England and Wales under Company No. 02569601 and VAT No. 577327607. The registered office address of Dimensional Fund Advisors Ltd. is 7 Down Street, London, W1J 7AJ, United Kingdom. Dimensional Fund Advisors Ltd. is a subsidiary of Dimensional Fund Advisors.