As we know, the modern-day Fed has reduced interest rates to record lows and has made it clear it has no intention of raising them anytime soon. To many, low interest rates sounds like a good thing and, like cash-for-clunkers or subprime mortgages, the practice certainly has the ability to create short-term stimulus. But the side effects include a declining US dollar, new asset bubbles that must eventually burst, and basically a misallocation of economic resources.

Those things are all concerns for the economy as a whole, but certainly the most “unfair” aspect of the artificially low interest rates is that it punishes savers. By cutting the federal funds rate to a range of zero percent to 0.25 percent, you earn almost nothing on these safe, cash-like investments such as short-term Treasuries, short-term CDs, and money market accounts into the gutter. The price a saver pays for protection of principal is pretty high these days. And yet nobody can disagree that if the American consumer could finally start saving money after decades of over-consumption and excessive credit, much stability could be restored to our currently tenuous economy.

Well, long-term Treasuries are not a very safe bet because the value and safety of those depends heavily on the strength of the nation’s balance sheet. With more than $12 trillion in debt and climbing, I think we can assume the global marketplace for long-term treasuries will continue to respond negatively. And even longer-term U.S. debt, such as corporate and junk bonds, are over priced.

So what type of investments can provide income or growth these days without risking too much of your principal?

Utilities. This includes natural gas providers, electric companies, and telecommunications companies. Now, it’s not like the old days where utilities could be counted on for steady dividends and low volatility, the favored investment of little old ladies. Clearly utilities aren’t recession proof, as we’ve seen with energy and telecommunications stocks. But the swings are typically much less severe than what you see in housing, technology, or manufacturing. And even during the worst downturns, those core businesses still tend to produce cash just because of the nature of the product and transaction.

Many utilities yield at least 5 percent or 6 percent. That’s better than you can get with Treasuries. Besides, the volatility can work in your favor as well. Buy the right stock at the right time and you can earn capital gains along with your yield.

Non-U.S. Fixed Income. You probably shouldn’t keep all your fixed income money in the U.S. The dollar has been falling virtually nonstop for months now. That hurts foreign owners of our debt. But the process works in your favor if you are an U.S.-based investor.

Consider buying foreign, fixed income securities, and as the dollar falls, the dollar value of your holdings will rise. Any principal and interest payments you receive in the foreign currency translate back into more dollars.

Speculating on currency alone is not for the faint of heart, but that’s not what I’m talking about here. Beyond just the currency impact, foreign yields will likely be substantially better than those offered here in the U.S. Bottom line: You can earn higher yields AND get a currency “kicker” by investing in foreign, fixed income securities. Foreign dividend-paying stocks are another alternative. Many yield much more than their U.S. counterparts.

Energy. Recently, the prices of most kinds of energy products– crude oil, gasoline, heating oil, and natural gas—have risen dramatically. But the business of exploring for, producing, and trading energy is relatively high risk. That translates to losses.

However, history shows that even during recessions energy use, regardless of cost, does not stop. So there is always a need to store and transport gas, oil, and other petroleum-based products.

Consider investing in a Master Limited Partnerships (a.k.a., MLP). Since they own many of the storage and distribution networks that energy companies use to get their products to market, they make money whether energy prices rise or fall.

Related posts:

1. MORE SIGNS OF UPCOMING DECLINES IN TREASURY AND SAVINGS BONDS
2. EARNING HIGHER INCOME IN A LOW YIELD MARKET
3. The Problem with Treasury Bonds as Fixed Income Investments

But now, money is flowing out of government bonds and into riskier assets once again, meaning yields are going back up. The yield on 10-year Treasury notes has nearly DOUBLED just since December.

The problem is what those higher yields do to the underlying face value of your bond—the bond price goes down. In fact, the benchmark 30-year U.S. Treasury bond has tumbled over 10 percent since April.  The price of long-term government bonds has already plunged more quickly than at any time in history. The Treasury bond market is crumbling and looks like it will for some time to come!  Scary as it may sound; perhaps someday the government will be unable to sell its long-term notes and bonds at ANY price.

Most non-political types would say the federal government’s increased spending and interest rates are the reason. Federal borrowing has soared to unbelievable levels. Nearly $100 billion in bonds, notes, and bills are being offered at each weekly Treasury auction — the most in our nation’s history. Interest rates are rising.   None of that money is going into the housing industry to provide mortgages and re-stabilize the real estate market.  It’s all going into subsidizing federal spending.

If I were, saying, over 55 years old and thinking about long-term retirement income, and did so almost exclusively in Treasury Bonds, I’d be terrified at the thought of my wealth evaporating so quickly.  You figured you could settle for low yields in exchange for no volatility.  Steady, albeit low income—you thought—would work, as long as it was “safe”.  And what could be safer than investing in the US government, you thought. But now you can’t even count on your portfolio of US treasury bonds to hold its value either?

Unfortunately, in my opinion, NO.   You can’t.

Please re-think your portfolio and how it will be affected by this new paradigm of high government spending and higher interest rates.  Consider re-allocating it to smarter, more profitable, and more worthy causes.

As I write in mid 2009, the US mortgage industry has nearly shut down.  Most good people are unable to get a mortgage, no matter what you hear on the news.  It’s as simple as that.  Surely you have a niece, cousin, brother-in-law, co-worker, or friend who can attest to their inability to qualify for a mortgage to buy a new house.

Consider an investment in something that provides a much more secure fixed income, such as a real estate Note, secured by somebody’s home.  And in the process you’ll make much higher income than with those traditional investments such as treasury bonds.

Related posts:

1. MORE SIGNS OF UPCOMING DECLINES IN TREASURY AND SAVINGS BONDS
2. UPDATE: ACHIEVING HIGHER YIELDS WITHOUT EXCESSIVE RISK
3. The High Yield Great Lakes Secured Income Investments