- In 2009, any signs of a less than dire economic outcome as deflation may burst the bubble in Treasuries.***
- This bubble is motivated by fear rather than greed. Investors
are seeking to protect themselves against deflation and declining
stock markets by blindly acquiring "risk-free" government bonds
[Financial Times - "FT"]
- Institutional investors also contributed to the bond bubble.
Pension funds, insurers and others have sold off toxic securitized
triple-A rated bonds and replaced them with Treasuries. Government
bonds are attractive for diversification purposes since they
have held up while just about everything else in their investment
portfolios has collapsed (FT)
- The Federal Reserve's signals that it might buy longer U.S. government maturities added momentum to the epic rally (FT)
- The median forecast of 19 primary dealers is that 10yr bond
yields will rise to 3% and 2yr yields will rise to 1.2% in 2009
(Bloomberg)
- Because of the low income on Treasury securities, it would
take only a small rise in yields for total returns on Treasuries
to turn negative (Merrill)
- Given the level of extension in yields, it would not be difficult
to generate losses of say 10% in the 10-year Treasury bond,
and as much as 20-25% in the 30-year Treasury bond over a very
short period of time [Hussman Funds - "Hussman"]
- If the dollar holds steady, Treasury bond prices are likely
to plunge; if Treasury prices hold steady, the value of the
dollar is likely to plunge. Either way, foreign holders of Treasury
securities are facing probable losses, and they know it (Hussman)
- The specter of deflation and Japan's experience in the 1990s
suggest bond yields could fall significantly further –
10yr JGB yields went on to find a low of 0.45% despite massive
fiscal stimulus. Ironically, it was the start of quantitative
easing in March 2001 when yields ticked up (JPMorgan)
While Roubini does not explicitly talk about
shorting long-term treasuries, as do Marc
Faber and Jim Rogers, he does appear to believe that the long-term
treasury bubble will likely burst. However, this is subject to
two large caveats:
(1) If the economic situation remains dire, the treasury bubble may continue for a while; and
(2) Instead of treasuries tanking, the dollar might tank.
