Toward the end of the stock market's worst week in generations, John Leis comforted a 63-year-old customer at the American Century branch in Leawood, Kan.
She'd arrived emotional, fearful and with her latest account statement – unopened.
“This is someone who … walks in and truly does not have the emotional stability to open that statement and see what it said,” recalled Leis, a director of the Kansas City-based fund company's personal financial solutions group.
It was Friday, Oct. 10. They sat and opened the envelope together. Her three government bond funds had averaged gains of about 6 percent during the last 12 months, the statement showed.
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“All along she had actually been in a very safe place and was making money,” Leis said.
Countless other investors around the globe rushed to join her that week and throughout October. They fled corporate stocks and bonds for the shelter of U.S. government-backed holdings.
Individuals' retirement accounts and college funds, at least what was left of them, were safe. Their futures, however, face other risks. Safety has its own price.
The huge global demand for U.S. Treasuries had an immediate impact on the rates Uncle Sam paid. Short-term Treasury rates crashed, which means the frantic buyers are now earning next to nothing.
Inflation, meanwhile, eats away at what their savings can buy in the future.
And once the panic subsides, savers with long-term goals face the daunting task of deciding when to get back to investing after having sold at what may turn out to be among the lowest prices for years.
“It could be the worst of both worlds,” said Stewart Koesten, president of KHC Wealth Management Services in Overland Park, Kan.
The American Century Capital Preservation Fund received much of the money sweeping out of other American Century funds last month. But Preservation Fund owners now earn less than 1 percent.
“That's for a whole year. To put it in that fund is one step above putting it in a mattress,” said Dave MacEwen, chief investment officer of American Century's fixed-income investing.
Such funds are super safe and can be cashed in for dollars at a moment's notice. But they come with a price. A year from now, the dollars that went into mattress funds will lose purchasing power because of inflation, currently running closer to 5 percent.
Koesten's worst scenario sees inflation accelerating once the economy comes out of its current downturn. The government has pumped so much money into the economy that inflation could easily ramp up, he said.
“The sense of security you're feeling right now is going to turn into a reality of dismay when, because of rising interest rates and inflation, these accounts are going to be decimated in terms of purchasing power,” Koesten said.
Koesten's inflationary forecast may not come true. But it illustrates why investors should not rely on short-term ultra-safe government-backed holdings to reach long-term goals.
Investors probably could do better buying just about anything other than the mattress funds that stick strictly with short-term Treasuries. Even other money market mutual funds offer much higher returns.
As rates plunged on Treasury-only funds, rates shot up on prime money market mutual funds that owned corporate IOUs called commercial paper, short-term asset-backed paper and other non-government securities.
Yields also have risen on municipal bonds, which were forsaken along with other non-federal obligations.
Treasury securities with longer maturities, five years or longer, will safely pay more, too. But they can become a trap if interest rates and inflation rise.