Bubble or not, Treasury bond buyers want more
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Interest rates on U.S. Treasury bonds traded at or near new lows late Monday after Federal Reserve officials continued to talk up “quantitative easing” -- a bigger program of T-bond purchases by the central bank.
If the Treasury market is a bubble, the Fed keeps giving investors more reason to inflate it further.
The 10-year T-note yield (charted below) was trading at 2.46%, matching its 19-month low on Sept. 28 and down from 2.51% on Friday.
The 2-year T-note was at 0.41%, a record low and down slightly from 0.42% on Friday.
The debate over how much lower Treasury yields can go isn’t just an academic exercise. If yields are bottoming then investors who buy bonds at this point can’t expect any capital gains on their holdings. At best they’ll just earn whatever interest the bonds pay.
And if market interest rates should rise from these levels existing fixed-rate bonds would lose value, with the longest-term securities the most vulnerable to depreciation (at least on paper).
Figure it this way: If you buy a bond paying 2.46%, and three months later new bonds of the same term pay 3%, nobody would pay you full price for your bond if you had to sell it.
Bond market bulls believe the Fed can and will drive market interest rates even lower by increasing its purchases of Treasuries and perhaps other types of bonds later this year, in theory putting more downward pressure on all long-term rates, including mortgage rates. The bullish case has gotten a boost in recent days from comments by key Fed officials.
New York Fed Bank President Bill Dudley came out strongly on Friday for a bigger bond-buying program. Another New York Fed official, Brian Sack, made similar comments early Monday.
And after markets closed Monday Fed Chairman Ben S. Bernanke also repeated support for the idea, telling students in Rhode Island: “I don’t have a number to give you, but I do think that the additional purchases, although we don’t have precise numbers, have the ability to ease financial conditions.’
Not everyone is convinced. Francesco Garzarelli, chief interest rate strategist for Goldman Sachs International in London, said Monday that he doubted that the 10-year T-note yield would fall much lower than current levels even assuming the Fed ramps up bond purchases.
‘Being bullish on rates is going to be the wrong trade going forward,’ Garzarelli said in the Wall Street Journal. ‘Yields will remain low, but we find better returns in the stock markets.’
It also helped the Treasury market on Monday that the Obama administration warned over the weekend of possible terrorist attacks in Europe. However dire the long-term finances of the developed world’s governments may be, their bonds still are the asset the world runs back to when geopolitical fears escalate.
-- Tom Petruno