WILL TREASURIES BE THE NEXT BUBBLE TO BURST?
During Thanksgiving my great-aunt told me she was considering pulling all her money from the stock market and putting it under her mattress. She was serious.
She is not alone in her confusion and concern over where to stash cash these days. Stocks are down 50 percent from their October 2007 high, by various measures national residential real estate is down by 20 percent in 2008, and commodities have tanked. Aside from the U.S. dollar, which saw a healthy rally of more than 20 percent from July to the fall, the U.S. Treasury market is the only place that has posted gains. Treasury prices have exploded higher in, well, a bubble-like fashion.
I remember the days back in the early 1990s when 30-year T-bond futures had a three-point daily limit. It was an extreme and unusual day to see a three-point move in bonds, perhaps something that occurred every couple of years. “Now, day in, day out, you are seeing two- and three-point moves,” says Robert T. Zukowski, chief technical strategist at 4Cast Inc.
Agreeing, MacNeil Curry, chief North American technical strategist at Barclays Capital, says, “If you look across all asset classes at average daily ranges on a percentage basis for 2008, it is at levels we haven’t seen since 1929-1930.”
FLIGHT TO QUALITY
For those who have been around the financial markets for awhile, “flight to quality” has been a term used at various times as a reason for moving into safe-haven instruments such as U.S. Treasuries. But this time it’s different.
“This is a real, honest-to-goodness flight to quality. The credit crunch changed everything. We are in an environment of falling prices, and the result is that every investment is a loser,” says longtime market watcher James Bianco, president of Bianco Research.
Dec. 1 saw 10-year Treasuries fall to their lowest yield since June 1955—a mere 2.64 percent, according to my data. Rates on two-year notes fell to 0.85 percent the same day, the lowest yield since the Federal Reserve began keeping those records in 1976.
Global portfolio managers, individuals and governments have been flocking to U.S. Treasuries in recent months amid the carnage across the financial spectrum. How low can Treasury yields go? “There is no reason for them to stop,” Bianco says. “This is the only place on the planet where anyone can make money right now.”
BULLISH FACTORS
In addition to the massive rush to safe-haven instruments, Treasury bonds have gotten a bid from the recession. Bonds generally rally during weak economic environments, amid reduced inflation concerns. In fact, deflation is the new buzzword, as consumer prices have been...