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

Equity investors should track market developments

The stock markets have been volatile over the last few days. They are in a sideways movement and trying to find the bottom after a fall of 20 percent a week ago. The market sentiments are not very positive at the moment and the recent developments are expected to dampen them further. Globally, governments and central banks are trying to cut rates and announce packages to improve business sentiments. These are some of the major developments in the markets last few month: A) Global On the global front, another large US bank went into a financial crisis. The US government took quick measures to avoid the spread negative sentiments in the markets. The US government announced a bail-out package and agreed to shoulder the losses on the bank's risky assets. China announced a large cut in interest rates and reserve ratio to boost the investor sentiments in the markets. Recently, the World Bank announced China's growth rate next year will come down to 7.5 percent. The European ...

Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:   Provident Fund (PF) & Voluntary Provident Fund (VPF) Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free. Public Provident Fund (PPF) An account can be opened wi...

Fortis Mutual Fund

Fortis Mutual Fund, a relatively new player, it is still to prove its case and define its position in the industry. In September 2004, it came onto the scene with a bang - three debt schemes, one MIP and one diversified equity scheme. And investors flocked to it. Going by the standards at that time, it had a great start in terms of garnering money. Mopping up over Rs 2,000 crore in five schemes was not bad at all. The fund house has not been too successful in the equity arena, in terms of assets. Though it has seven equity schemes, it is debt and cash funds that corner the major portion of the assets. Most of the schemes are pretty new, and the two that have been around for a while have a 3-star rating each. The last two were Fortis Sustainable Development (April 2007), which received a rather poor response, and Fortis China India (October 2007). Fortis Flexi Debt has been one of the better performing funds, after a dismal performance in 2005. It currently has a 5-star rating. None ...

Gold: It is safe & secure

RETURNS ON GOLD & ITS ETF’s RISE WHILE most of the popular asset classes are going through bad times, the yellow metal shines on. In fact, in the last one year, gold has given a return of more than 25% and currently trades at Rs 14,695 per 10 gm. Even gold exchange traded funds ( ETFs ) have appreciated substantially. Gold Gold Benchmark Exchange Traded Scheme ( BeES ) and Kotak Gold ETF have given more than 25% returns each in the last three months. Even as the equity markets have taken a hit with the Sensex losing around 46% in the last one year and real estate prices also witness a correction, investors’ preference has shifted to safe havens such as gold. On an average, most of the diversified equity mutual funds have fallen and real estate developers are offering discounts. Thus gold remains the safest bet. The appreciation in the gold prices is mainly due to its safe haven status. The key reason for gold to go up is lack of other investment opportunity. There is also a risk in...

Alpha - The relative performance

Alpha, the net performance of a component against the benchmark is an overlooked tool   Absolutely speaking, any bounce back now on markets should be the last for the year. We offcourse can be wrong and prefer to be judged on alpha (relative performance) as relative accountability is fine with us. According to Alpha India, the top outperformers in the weeks ahead should be Reliance Communications, Reliance Infrastructure, SBI, HDFC, ONGC, Larsen, Jaiprakash Associates, Maruti, Bharti and DLF. On the short side (reduce side), we have Ranbaxy, ACC, Sail, Tata Steel, Wipro, Tata Motors, Sun Pharma, TCS, M&M and Infosys.   Performance like everything follows the 80-20 rule, 80 per cent of your gains are going to come from 20 per cent of your portfolio. So why not give it a thought? The importance of alpha If alpha was so important, then why don ' t newspapers and websites publish it? Why alpha gets featured annually but not as intraday or daily event? Why don ' t we c...
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