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Treasuries: The New New Bubble?

Posted Dec 03, 2008 01:20pm EST by Aaron Task in Investing, Recession

Updated from 1:20 p.m. ET 

Are Treasuries the next bubble? A lot of traders seem to think so after a sharp rally in Treasury prices sent yields down to their lowest levels in decades.

"There's more risk in things people think are inherently safe, [including] cash and Treasuries, vs. the things people perceive as risky," Jim Grant of Grant's Interest Rate Observer said on CNBC this morning.

Before rising modestly Wednesday, the 30-year yield was at 3.197%, its lowest level since 1973 while the 10-year's yield was below 2.7%. Even after rising a bit today, yields from 3-month to 2-year Treasuries are below 1%.

Update: Treasury prices rebounded from their early decline after the Port Authority of NY & NJ was forced to cancel a $300 billion debt offering due to a lack of bidders.  

Earlier: In a nutshell, Treasury yields that low (and failed offerings by other government agencies) show institutional investors remain much more concerned about capital preservation than they are in capital appreciation. Put another way, all the talk about how "cheap" stocks are relative to Treasuries has done very little to compel big money to make the leap out of the "safety" of government debt, thus far.

The same can be said of corporate bonds, where companies like H-P, Caterpillar, ConEd and Citigroup were able to raise billions this week but at yields far above comparable Treasuries. Ironically, Citigroup's offering had the lowest relative yield because it now enjoys the implied backing of the U.S. government.

(A quick primer on bonds: More demand for a debt security drives up its price and lowers the rate of interest, or yield, the borrower — say the U.S. government — has to pay. If demand falls, prices drop and the borrower — say big corporations — has to entice buyers with a higher yield.)

Given the massive amounts of Federal bailout dollars being put to work, the incredible expansion of the Fed's balance sheet and the soaring U.S. deficit (these are all intimately connected of course) the "Treasuries are a bubble" view makes a lot of sense: The dollar must fall, inflation must rise, foreigners will demand higher rates on Treasuries, etc.

But a few caveats:

  • Treasuries have arguably been "overvalued" for a while now and markets can stay irrational longer than you can stay solvent.
  • During Japan's "lost decade," government bonds (JGBs) outperformed stocks as the fear of deflation trumped investors' desire to take any risk; the same thing could happen here.
  • Economist Joe Brusuelas wonders: "With the Fed committed to purchasing Treasuries" — as per Ben Bernanke's speech on Monday — "does that not mean any potential Treasury bubble has legs?"

88 Comments

Reedersong
Reedersong - Wednesday December 03, 2008 01:26PM EST

OIL TO 30!!!

Reedersong
Reedersong - Wednesday December 03, 2008 01:29PM EST

Shorting is the next bubble, right?

Yahoo! Finance User
Yahoo! Finance User - Wednesday December 03, 2008 01:32PM EST

No reason to worry about wolves ... until we hear them howling at our door, right?

__A_YAHOO_USER__
__A_YAHOO_USER__ - Wednesday December 03, 2008 01:33PM EST

I AM NUETRAL AT THE MOMENT..... I REST.....

Out of Focus
Out of Focus - Wednesday December 03, 2008 01:40PM EST

I've been calling for this for years. Treasuries are the next shoe to drop. Mark my words on this one.

georgeg
georgeg - Wednesday December 03, 2008 01:41PM EST

I liked it a lot better when tthe MAFIA was in charge of this Country even they could manage money better than the Governement. WHERE IS THE TARP MONEY...Even the GAO can not see what the Banks are doing. Zero percent mortgage rates are valueless if no one is in place to loan the money.

Robert
Robert - Wednesday December 03, 2008 01:45PM EST

There is a tipping point out there somewhere, where the Treasury goes to market to sell debt for bailouts, stimulus packages, government operating expense, whatever, and the buyers start to have less interest in buying or money with which to buy. Then, it's Katy bar the door! Interest rates shoot up, dollar plunges, inflation takes off, and we're really in a jam. I just hope that tipping point is a long way off and foreigners continue to believe we'll be the largest economy in the world forever!!

Yahoo! Finance User
Yahoo! Finance User - Wednesday December 03, 2008 01:45PM EST

Lets sum it up - we've been thru the following bubbles recently -- Tech Bubble Mortgage/Debt Bubble Auto Bubble Oil Bubble Now treasuries..good lord whats next??! www.tickerwatcher.com

Reedersong
Reedersong - Wednesday December 03, 2008 01:51PM EST

Well, I am not going to argue with Out of Focus again, without doing my research.

lm
lm - Wednesday December 03, 2008 01:55PM EST

Unreal folks unreal!! They want to break EVERYONE SO EVERYONE OS GOVERNMENT DEPENDENT THAT ENDS THE CLASS WARFARE SINCE THEY CANT MAKE PEOPLE WEALTHY BUT THEY SURE AS CAN MAKE US ALL BROKE!!! WHY DO YOU THINK THEY LIMIT HO WMUCH YOU CAN PUT INTO YOUR 401K?? IRA's?? etc BECAUSE THEY WANT US DEPENDENT AND IF YOU JUST THOUGHT THAT WAS JUST A LIBERAL/LEFT WING THING YOU NOW KNOW HOW WRONG YOU CAN BE THE GOP NEVER EVER HAS CHANGED THOSE ANTI-HUMAN LAWS

Mari
Mari - Wednesday December 03, 2008 01:55PM EST

rampant inflation is just around the corner....just after real estate values fall another 20-30%, the auto companies (and many other corporations file for bankruptcy protection) and after credit card based securities and commercial paper becomes almost valueless. buy gold and silver now. get into cash. wait.

Yahoo! Finance User
Yahoo! Finance User - Wednesday December 03, 2008 01:57PM EST

Bye Bye American Pie, this will be the day when it dies.

Yahoo! Finance User
Yahoo! Finance User - Wednesday December 03, 2008 02:00PM EST

Bublle are ballon will fly to sky soon.

Yahoo! Finance User
Yahoo! Finance User - Wednesday December 03, 2008 02:01PM EST

Bublle are ballon will fly to sky together soon.

Yahoo! Finance User
Yahoo! Finance User - Wednesday December 03, 2008 02:05PM EST

You forgot the Gold Bubble

Yahoo! Finance User
Yahoo! Finance User - Wednesday December 03, 2008 02:07PM EST

If one thing is certain(and its been proved by this dominos effect crisis), nothing is certain. Not one investment vehicle has been a safe haven. Why should treasuries be safe? Because they have always been safe before? We know the flaws in that logic. Look, be prepared for anything, and let nothing surprise you. I know you can't forget last year's 147.00 a barrel oil. Its now 47.00! Need I say more...

ShiunnLuenStevenS
ShiunnLuenStevenS - Wednesday December 03, 2008 02:15PM EST

Chaotic run on every denomination and finance vehicle is imminent since no sign of lesson learned with repent sentiment. Look at every line of business crying Fed daddy's bail out and equally shameful government just keep on bluffing (to the global investors especially stupid Chinese government) and busy with the printing. Your tactic here of pumping the Dow will be a self fulfill prophecy and both Dow and Bond market will be crashed eventually since no leg will be there to support it. Global investors is starting to have a run on chasing the Gold and other precious metals.

JustinT
JustinT - Wednesday December 03, 2008 02:16PM EST

SELL SELL SELL ! ! !... ------- Take FULL advantage of the Treasury manipulating markets, before YOU get manipulated. ------- OR Trust the government, corporate welfare, and largess well-earned bonuses, as well as Reganomics and TRICKLE-DOWN WEALTH !!! ------- Afterall, "THEY" are from the GOVERNMENT, and "THEY" are here to help us. ------- I don't know where your money is, but my money is on SELL-SELL-SELL into inflated Treasury-manipulated DOW upticks, as well as pillows, mattresses, and coffee cans, as those are the items that kept my family from the corporate voltures of the 1930s. ------- Oh yea, that's right, the 1930s were the "OLD DAYS" before education caught on, and whlie our grandparents, and great-grandparents were enduring a thankless wealth-salvaging mission so their spoiled, dummied-down sons/daughters, grandchildren, and great-grandchildren would have a chance in life. ------- Thank GOoDness for the auto-pilot education system that is in place today! Joe America, get OUT THERE and rescue this economy for corporate America - SPEND, SPEND, SPEND !!! ------- Peace, and may God be with you and your family.

BrandonT
BrandonT - Wednesday December 03, 2008 02:20PM EST

When this pops, the dollar could become next to worthless. Feeling screwed today? Wait till the way you feel that morning. This is being done on purpose, no way this is all accidental.

__A_YAHOO_USER__
__A_YAHOO_USER__ - Wednesday December 03, 2008 02:23PM EST

I've cut up my credit cards, except for 2 of them. And my money is going into my safe, instead of the bank. And don't even think about coming to steal it. It is guarded by Max, the large German Shepard by day and Smith and Wesson at night. Let me know when these idiots are done screwing up the system. Maybe then, Maybe I'll think about putting my money back into the bank. Til then, I'll be paying cash for just about everything.

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