Money & Company

Tracking the market and economic trends
that shape your finances.

« Previous Post | Money & Company Home | Next Post »

Despite puny yields, Treasuries keep reeling in buyers

March 10, 2009 |  8:30 am

Global stock markets' misery this year has had a silver lining for Uncle Sam: It has kept fearful investors willing and able to buy Treasury securities as a haven.

Demand for Treasuries will be tested again this week as the government sells $63 billion in longer-term notes and bonds over the next three days, beginning with an auction of $34 billion in three-year notes today.

The Treasury will offer $18 billion in 10-year notes on Wednesday and $11 billion in 30-year bonds on Thursday.

The Obama administration needs huge sums of fresh cash to fund the financial-system rescue, the economic stimulus plan and the wars in Iraq and Afghanistan. Government borrowing may reach $2 trillion this year, by some estimates.

Tbondyieldsmarch9 Interest yields on longer-term Treasuries had fallen to generational lows in December as demand temporarily swamped supply. But in January yields snapped higher on the government's 10-year and 30-year debt, as some investors began to balk at accepting such paltry returns.

The 30-year T-bond yield, for example, jumped from 2.5% to 3.7% in the span of seven weeks.

But since late January longer-term Treasury yields have largely treaded water. As the stock market has dived again and pessimism about the economy has resurged, global investors have turned back to the relative safety of Treasuries, said Ray Remy, head of fixed income at Daiwa Securities America in New York.

"There's a bit of the flight-to-quality trade again," he said.

Tom Tucci, head of government bond trading at RBC Capital Markets in New York, says demand for Treasuries is coming in part from traumatized investors "who are not going back to the stock market" with their savings. . . .

A 2.9% annual interest yield on a 10-year T-note isn't much, but compared with the 25% drop in the Dow Jones industrial average since Dec. 31 it looks like a dream of a return.

The Treasury market also is being helped this year by the dollar's strength against other major currencies, which gives foreign investors more confidence to buy U.S. bonds. "The dollar has just been a gem" for Treasuries, Remy said.

In the last week, demand for government bonds in the U.S. and in Europe has been stoked by another factor: The Bank of England's announcement that it would begin buying British government bonds for its own account, to help keep long-term interest rates down for the morose economy.

The U.S. Federal Reserve has previously said it would consider buying Treasury notes and bonds if necessary to keep a ceiling on long-term rates.

(If you're thinking this sounds like the government buying its own paper, you aren't alone.)

Tucci said he believed that any Fed purchases of Treasuries "would be down the road," not imminent. But noting the still-massive Treasury borrowing to come this year, Fed purchases "may be something that they'll have to do" if private investor demand weakens for whatever reason, he said -- say, because of inflation jitters, a plunge in the dollar or some cataclysm that shakes global confidence in Uncle Sam's creditworthiness.

-- Tom Petruno