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

How to Decide your asset allocation with Mutual Funds?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India) How to Decide your asset allocation ? The funds that base their equity allocation on market valuation have given stable returns in the past. Pick these if you are a buy-and-forget investor. Small investors are often victims of greed and fear. When markets are rising, greed makes the small investor increase his exposure to stocks. And when stocks crash to low levels, fear makes him redeem his investments. But there are a few funds that avoid this risk by continuously changing the asset mix of their portfolios. Their allocation to equity is not based on the fund manager's outlook for the market, but on its valuations. Our top pick is the Franklin Templeton Dynamic PE Ratio Fund, a fund of funds that divides its corpus between two schemes from the same fund house-the...

All about "Derivatives"

What are derivatives? Derivatives are financial instruments, which as the name suggests, derive their value from another asset — called the underlying. What are the typical underlying assets? Any asset, whose price is dynamic, probably has a derivative contract today. The most popular ones being stocks, indices, precious metals, commodities, agro products, currencies, etc. Why were they invented? In an increasingly dynamic world, prices of virtually all assets keep changing, thereby exposing participants to price risks. Hence, derivatives were invented to negate these price fluctuations. For example, a wheat farmer expects to sell his crop at the current price of Rs 10/kg and make profits of Rs 2/kg. But, by the time his crop is ready, the price of wheat may have gone down to Rs 5/kg, making him sell his crop at a loss of Rs 3/kg. In order to avoid this, he may enter into a forward contract, agreeing to sell wheat at Rs 10/ kg, right at the outset. So, even if the price of wheat falls ...

Benefits Of Repo Rate & CRR Rate Cut On Consumers

  How Reduction In Repo Rate & CRR Affects Customers Finally  RBI announced slashing of repo rate by 25 basis points (bps ) and cash reserve ratio (CRR) by 25 bps which industry experts believe will fuel the economic growth to some extent. Although experts were expecting higher rate cut this year. This lowering of the rate cuts has taken place for the first time in nine months. Now let's see how reducing the repo rate (defined in economic term as the rate at which RBI lends money to the banks) relates to the following individuals and sectors: Banking:   Lowering of repo rate directly reduces borrowing costs of a bank. Banks in turn reduces interest rates on different types of loans such as home, auto, business etc. Similarly trimming down of CRR allows banks to unlock money for lending to the customers i.e. with 0.25 rate cut banks are estimated to lend more than INR. 17 Crores. Consumers:   Lower repo rate does not necessarily benefit existing loan borrowers but new loan se...

Zero Coupon Bonds or discount bond or deep discount bond

A ZERO-COUPON bond (also called a discount bond or deep discount bond ) is a bond bought at a price lower than its face value with the face value repaid at the time of maturity.   There is no coupon or interim payments, hence the term zero-coupon bond. Investors earn return from the compounded interest all paid at maturity plus the difference between the discounted price of the bond and its par (or redemption) value. In contrast, an investor who has a regular bond receives income from coupon payments, which are usually made semi-annually. The investor also receives the principal or face value of the investment when the bond matures. Zero-coupon bonds may be long or short-term investments.   Long term zero coupon maturity dates typically start at 10 years. The bonds can be held until maturity or sold on secondary bond markets.

Online submission of PAN Grievances

Investors may have various grievances with respect to their PAN application, like the non-allotment of PAN or an error or mismatch in the name on the card. The Income Tax Department has an online grievance management system, which allows investors to submit their complaints pertaining to PAN applications registered with UTITSL or NSDL.Here's how you can go about lodging a PAN related complaint online. Portal Grievances related to PAN can be lodged by logging on to incometax.sparshindia.com , and going to the PAN section. Complaint menu Complaints pertaining to applications for PAN submitted either to UTITSL or NSDL can be lodged by clicking the `submit' link. On clicking this link, a form for PAN grievances is displayed. The complainant is required to choose the nature of the complaint from the dropdown menu provided on the form. Details The complainant has to provide mandatory details such as receipt or coupon number of the PAN application.The complainant's name, addre...
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