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Watch treasury and government bonds
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A year after the global credit crisis first erupted, demand for comparatively "safe" government bonds among investors fleeing riskier assets may prove costly as inflation rises.
Once the concerns about systemic risks to the global banking system start to abate, those bond investors holding longer maturity US Treasuries are especially vulnerable to a new reality: that inflation has made these assets way overvalued.
With U.S. headline consumer price inflation now running at 5.0 percent year-over-year, investors holding both the 10-year note, yielding around 3.95 percent and the 30-year long bond, at 4.57 percent, are losing purchasing power.
Should U.S. inflation remain near 5.0 percent and the flood of write downs and losses at banks slow from a torrent to a trickle, a major investment shift could occur into beaten up bank stocks and out of government bonds.
It really is the last of the bubbles,because of the flight to safety, people may realize they are getting a negative yield (below inflation) across the curve in U.S. Treasuries, but just don't care.
But when investors' focus shifts to inflation pressures and a rising tide of U.S. government debt issuance that further weakens the U.S. dollar, Treasuries could suffer a rout.
The U.S. governments fiscal deficit is projected to be a record over $450 billion next year and Congress has just raised the national debt limit to $10.6 trillion as part of the housing rescue package it authorized last week.
The coup de grace for the Treasury market would be if Asian investors, notably Japan and China who hold more than one fifth of the $4.7 trillion Treasury securities outstanding, were to pare back their fresh purchases of U.S. government bonds, analysts fret.
The 30-year bond's yield could jump to around 7.0 percent on persistent inflation and decreased foreign buying, which would slash its value.
U.S. inflation is likely to stay between 4.0 and 5.0 percent over the long term, despite the fall in crude oil prices this month, making buying the long bond at its current yield a risky proposition.
He is shunning longer maturity bonds and instead favors Federal Deposit Insurance Corp. (FDIC) insured bank certificates of deposit, or high dividend yielding stocks.
Indeed, the U.S. stock market's response to the global banking system's rising tally of more than $400 billion in write-downs may be the biggest near term driver of Treasuries' direction, followed by inflation.
As commodities and stocks sell off with global economic growth slowing, while inflation rises thanks to high global fuel and food prices, shades of 1970s style "stagflation" are beginning to haunt the bond market.
In the short term, investors desire to shelter in U.S. government bonds may intensify, argued David Rosenberg, North American economist with Merrill Lynch in a research note.
Rosenberg expects a bubble in the Treasury market is only just starting to form and that a combination of dire economic news and a prolonged credit crunch will drive Treasury yields lower.
Near term at least, Rosenberg does not expect Treasury yields to spike up because he expects deflationary pressures will eclipse the current inflation trend, as commodities continue to retreat from record high prices, and while the U.S. housing market continues to depress home prices.
Others view the Treasury market as a bubble that has already popped, after the panicked "Ides of March" rush into ultra-short dated Treasury instruments when U.S. investment bank Bear Stearns had to be rescued with Federal Reserve help.
In mid-March when Bear Stearns had to be rescued, the 1-month Treasury bill yield dropped to about 0.76 percent, the lowest since 2001 according to Global Financial Data. Its yield has since rebounded to 1.6 percent.
But for longer maturity Treasury securities, Ake expects increasing U.S. government debt issuance will be needed to fund the economic stimulus package, beleaguered mortgage giants Fannie Mae and Freddie Mac, and the wars in Iraq and Afghanistan, so bond yields will steadily rise.
As that deficit rises,focus is on inflating the way out of the debt and monetizing the mortgage industry in increasingly worthless dollars.
As U.S. government debt issuance swells, Treasury yields will have to rise, because I just don't think the dollar will be worth as much over time.
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| Tarih
: 8/3/2008 |
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Copyright
© 2006 Mert TOKER All Rights Reserved. |
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