I elected to move the majority of my 401K to treasuries for capital preservation months ago. It is paying 10X more than cash interest. But lately, I've been a little anxious with talk of a bond bubble on the horizon. I'm thinking when the exchange rate decides to go the other way, Bonds may tank? I'm seeking to understand what will cause the bubble, and what we should look for before the fall. Here is a snip from an article recently released for those of us using bond funds and treasuries as safe haven. I'm thinking we'll have another run on treasuries if the middle east goes up in flames, which will be a good time to eit bonds and go equities. Thoughts?
The world's most influential central bank is far from alone in this regard. Even through the running U.S. fiscal dramas of the last two years, foreigners have feasted on a steady diet of Treasuries, mainly for foreign exchange reasons.
According to the latest Treasury International Capital report, Japan and China are the two largest buyers of long-term U.S. government paper. Tokyo is committed to depressing the yen, and uses Treasuries to help pad its FX reserves; Beijing, meanwhile, is a big buyer of U.S. bonds as part of its strategy of pegging its currency, the yuan, to the dollar.
As a result, bond investors' "hands are forced," said Anthem Blanchard, CEO of Blanchard Vault, a retail gold and silver supplier. "U.S. agency debt and Treasury debt is the only market that's liquid, all other countries around the world trying to devalue their currencies."
The cycle of central bank buying has helped depress long-term Treasury yields at near record lows around two percent, even as risk appetite has sent stocks on a tear. At least for now, investors still see U.S. debt as the safest of safe havens.
"In terms of Finance 101, technically it is risk free," Blanchard said. With inflation relatively low, "The U.S. government gets an interest rate free loan…and won't be allowed to default" because the Fed can print money despite inflationary risks, he said.