Skip to main content

US treasuries seen at risk of bubble trouble

US GOVERNMENT debt, long considered the safest investment in the world, looks like it too has been hit by “bubble” fever. Prices of US Treasury bonds appear dangerously overstretched after a soaring rally, another sign of how financial markets have been turned on their head.

Treasuries are the riskiest securities on the planet.

While few fear that the US government will fail to honor its debts, many see a risk that bond prices may plunge just as spectacularly as house, commodity and stock prices have in recent months.

It looks like the Treasury market is in bubble territory.

The rally in the nearly $5 trillion US government bond market picked up speed this week when the Federal Reserve hinted it may buy longer maturity government bonds.

Fears of a bubble in Treasuries underscore how far investors have fled from risk since ballooning house price valuations popped in 2007, causing huge losses in markets across the board and sparking a global economic crisis.

Yields on long-maturing bonds are below 3 percent and only 1-2 basis points on three-month T-bills, the lowest in decades. After buying billions of dollars worth of government debt, US institutional investors and foreigners including Asian central banks could incur enormous capital losses.

Treasuries are pricing in depression and I just don't think we will dive into depression-like activity.

That said, the relentless rise in Treasury prices may continue further amid little sign of an end to the panicked exodus from stocks which are down nearly 40 percent this year, and corporate bonds, hurt by fears of default.

Data on Friday showing November as the worst month for US job losses since 1974, which prompted some economists to predict the country's recession could be longer than previously thought. Some investors and economists also fear deflation, an environment of falling prices. That would push yields, or the return for investors on bonds, yet lower than their already five-decade troughs.

The stampede into Treasuries has left the benchmark 10-year Treasury note's yield, which moves inversely to its price, at 2.51 percent this week, the lowest since the 1950s.

Think it is safe to say that Treasuries have moved into a self-destructing yield environment.

Treasuries got a hefty boost on Monday after Fed Chairman Ben Bernanke said the US central bank might buy long dated Treasuries. Such a move would help lower mortgage rates and address one of the root causes of the global credit crisis. Despite the slump in yields and fears of a new bubble, investors are reluctant to move away from their favorite safe-haven. Many fund managers are staring at huge losses in riskier markets and would be unwilling to make big bets there. You will have many hiding there, bidding up the market, because many investors can't stand to lose anymore money before closing the books this year.

The latest gains bring the US government bond market closer to the brink of a potentially vicious sell-off. It is now highly vulnerable to a surge of between $1 trillion and $2 trillion of new government issuance to pay for massive bailouts of the financial sector, bond analysts warn.

If that issuance impacts the market just when investors start venturing back into corporate bonds, the fall in prices could be rapid. Once confidence returns, which I expect over a six-month time horizon, safe-haven flows will go into some of these markets with more appealing returns such as corporate bonds. Even if rates do not change over the next 12 months, total returns from the 10-year note would be a measly 2.6 percent versus a 3.4 percent dividend yield for the Standard & Poor's 500 index of leading shares.

Doug Kass, president of Seabreeze Partners Management, told Reuters that he is shorting the government bond market, betting on a fall in prices.

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Bharat Bond ETF

Top SIP Funds Online   The government of India has paved the way for the launch of India's first corporate bond ETF called as Bharat Bond ETF. Edelweiss Mutual Fund will be managing it. The fund is mandated to invest in AAA-rated bonds of select public sector companies (see the table 'List of constituents and their proportions in the portfolio'). The government has a threefold objective behind launching this product. One, to deepen the liquidity of the Indian debt markets and provide a gateway for easy retail participation. Two, to solve investors' dilemma of picking premium bonds. Lastly, to help the underlying government-owned companies raise funding for their operations. But does it make sense for you, the investor, to invest in it? Lets find out. What is the product? As the name suggests, it is an exchange-traded fund which will be listed on a stock exchange from where its units can be bought and sold post launch. It will have two variants - one maturing in 3 ye...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now