Sunday, December 07, 2008

US Treasury Yields Near Zero


WASHINGTON - THE panic in global financial markets has sparked an unprecedented rush into safe US Treasury securities, driving yields on short-term government notes down to almost zero.

Due to stampeding demand for safe short-term investments, the US Treasury's four-week and three-month bills on Friday yielded an effective rate of 0.01 per cent - down sharply from 1.515 per cent and 1.785 per cent, respectively, in early September.

Other Treasuries are also showing record low yields. The 10-year bond yield fell as low as 2.505 per cent and the 30-year bond yield slid to 3.005 per cent at one point on Friday. The six-month bond yielded a mere 0.20 per cent.

The low yields reflect a surge in demand for these instruments, seen as the safest in the world during times of turmoil.

'Investors seem to be content to sell stocks and park into the bonds for now,' said Mr Greg Michalowski of the financial website FXDD.

Analysts say the fear factor has pushed up demand for Treasuries, since investors are virtually certain the US government will not default.

Other factors include worries about deflation and the overall trend in interest rates, with the Federal Reserve having cut its base lending rate to a historic low of 1.0 per cent, and further reductions possible.

But Mr Bob Eisenbeis, analyst at Cumberland Advisors, said the unprecedented low yields are a sign of 'dysfunction' in markets.

Eisenbeis said US municipal bonds are paying upwards of 6.0 per cent tax-free and corporate bonds even more, but that fears of default and a lack of knowledge about underlying bond quality have led investors to shun these alternatives.

One reason for the surge in demand for Treasuries, said Mr Eisenbeis, is the Federal Reserve's decision to flood financial markets with liquidity including through other central banks.

Many central banks and commercial banks are reluctant to use this cash for traditional lending, and are buying Treasuries to ride out the storm, Mr Eisenbeis added.

A big question for the market is whether the Treasury market has become a bubble that will burst.

Although the low rates allow Washington to borrow money cheaply, Mr Eisenbeis said such a scenario could be perilous for the economy and the dollar.

'When you have this huge flood of liquidity into the marketplace, that can't last forever,' he said.

A bursting of this bubble could mean a rush out of Treasuries, forcing the government to pay higher rates on an unprecedented amount of debt.

'We would have huge increases in our costs and people wouldn't want to hold Treasury obligations anymore because of the capital losses,' Mr Eisenbeis said.

'You could have a huge switch in interest rates very quickly.' Mr Mike Larson, an analyst at Weiss Research, says the long-term bond market could be 'the biggest bubble of all', worse than the dot-com and real estate bubbles.

'Treasury bonds almost never move this far, this fast. And interest rates, which move in the opposite direction of bond prices, almost never fall this far, this fast,' Mr Larson said.

Mr Larson said the yield on the 10-year Treasury bond plunged from a mid-October high of 4.08 per cent to nearly 2.5 per cent this week, 'yielding lows not seen since the mid-1950s'. 'There are lots of reasons to believe this Treasury rally is unsustainable, and that a day of reckoning is fast approaching,' he said.

Mr Sal Guatieri, economist at BMO Capital Markets, acknowledged that 'investors are throwing money at Uncle Sam with the same conviction that they bought houses and dot-com stocks in their heydays'. But he argued that if inflation is quashed and investors retain confidence in the US government, the dangers have not yet hit a boiling point.

'While Treasuries may be overpriced, they probably are not yet in a bubble,' he said.

Comments: The continued buying of US Treasuries indicates a few major conclusions:

a) the aversion to corporate bonds, the risk in corporate defaults is still high


b) the aversion to risk is very high, many are willing to accept 0% yield to be in USD


c) that the markets are unconvinced on the measures promoted by the government so far

d) the anticipation of more major corporate collapses, and maybe even more bailouts to come


e) the aversion to stocks of any kind, even US stocks, hence we are seeing no flow of funds to emerging markets for now


f) the zero yield is the most important indicator that financials and credit markets are not working properly


g) corporates will have enormous difficulty to raise funds or even renew their funding


h) the pressure has mounted significantly for governments to do a lot more to unfreeze credit markets


i) this will cause most companies to hoard cash rather than reinvest, in other words companies will be cutting back operations and capacity further, a priority will be to push down inventory


j) If investors are willing to hold zero yield Treasuries, its a telling sign that people want to be in CASH but not in a bank as they do not trust their money within any banks

doraiddd has left a new comment on your post "US Treasury Yields Near Zero":

k) this notion that us treasuries are also the safest asset class to be in will be soon proven to be the ultimate fallacy... and fantasy...

l) us treasuries are the last remaining asset bubble left. Expect the chinese, arabs and the japanese to unload soon....

m) when the panic stampede starts outta us treasuries, where u gonna hide? where u gonna run? who's gonna save you??

n) maybe perhaps king midas himself...?


Expect a trying week for stock markets globally. Not a nice way to end 2008.


p/s photos: Zhou Wei Tong

5 comments:

Chan Kwang Yew said...

Dear Dali, the belief that the US government will not default on these treasury bills is a vicious circle game. They can always print more new treasury bill to rollover the fund needed for the old bills. If US is a private company, it would bankrupt long ago. What can happen if certain party somehow can start a wave of panic selling in these bills with no buyer.

doraiddd said...

k) this notion that us treasuries are also the safest asset class to be in will be soon proven to be the ultimate fallacy... and fantasy...

l) us treasuries are the last remaining asset bubble left. Expect the chinese, arabs and the japanese to unload soon....

m) when the panic stampede starts outta us treasuries, where u gonna hide? where u gonna run? who's gonna save you??

n) maybe perhaps king midas himself...?

Gamelion said...

If the safest US treasuries bond can yield near zero percentage, it show DEFLATION is coming to town. How it will affect the economy as a whole , you can start to refer the Japan model as a guideline where its interest rate now still yield near zero percentage !!!

see said...

How come no deflation here? harga barang tak turun

solomon said...

Looking at the tail sign at the floor, I am convinced that in the near term, some big players will unload the Treasuries. By then, it will be catastrophe for funds isn't it?

While the bear rallies are forming, I think it will claws at traders this week. Expect the unexpected when the Obama effect fades.

I still think that Santa & the deers will appear before the year end for a good closing. At the mean time, just enjoying myself with the 2V1G songs as recommended. The novel will be next.