ON POPPING THE TREASURY BUBBLE

BUBBLE TO BUBBLE

One of the biggest question for the financial markets in 2009 are the potential consequences of the building bubble in U.S. Treasury debt.  This WSJ story explains the problem:

"A chief concern is the amount of issuance on tap. Goldman Sachs Group Inc. puts the amount the U.S. government needs to raise at about $2 trillion, including new issuance and rolled-over securities. Goldman said it could be more, depending on the size of the incoming Obama administration's stimulus package.

The worry: Just as this onslaught of debt hits, investors could turn their noses at the Treasury market's historic low yields and venture instead into riskier assets. That likely would be even more the case once government programs to kick-start financial markets and the economy gain traction.

Treasury prices would fall and yields rise, making it much more expensive for the government to raise the funds needed to help the economy."

As Barron's articulated the problem in a cover story this weekend,

"THE BIGGEST INVESTMENT BUBBLE TODAY may involve one of the safest asset classes: U.S. Treasuries. Yields have plunged to some of the lowest levels since the 1940s as investors, fearful of a sustained global economic downturn and potential deflation, have rushed to purchase government-issued debt.

The market also has been supported by comments from the Federal Reserve that it, too, may buy long-term Treasuries. - As a result, the benchmark 10-year Treasury note yields just 2.40%, down from 3.85% as recently as mid-November.

The 30-year T-bond stands at 2.82%, and three-month Treasury bills were sold last week for a yield of just 0.05%. - Many investors argue it's dangerous to buy Treasuries with such low yields. While a holder can expect to get repaid in

full at maturity, the price of longer-term Treasuries could fall sharply in the interim if yields rise. The 30-year T-bond, for instance, would drop 25% in price if its yield rose to 4.35%, where it stood as recently as Nov. 13."

We haven't been at these levels in Treasuries since the 1960s, as the chart accompanying the Barron's story indicates.  Hopefully we'll be able to make the transition off this newest Bubble in one piece.

Comments

[Shannon Melton]

Paco Ahlgren on the Treasury bubble, gold, oil, and the failing dollar.

http://experienceiseverything.blogspot.com/2009/01/treasury-bubble-update-1709.html

[Shannon Melton]

Paco Ahlgren on the Treasury bubble, gold, oil, and the failing dollar.

http://experienceiseverything.blogspot.com/2009/01/treasury-bubble-update-1709.html