Treasuries: The Brand to Trust
On April 5, the yield on the ten-year Treasury note closed at 4.01%. That was its first finish above 4% in 18 months. Given the huge amount of outstanding Treasury debt and the government’s monumental borrowing needs, many people wondered what took so long. Then they’d often ask how fast it would reach 5%. Do I hear 6%? 7%? The message: Stay away from long-term Treasuries. You’ll get clobbered.
Wrong. The ten-year bond closed at 3.16% on June 22. If you had bought one on April 5, you would have seen the value of your investment appreciate by 7.1%—bond prices move inversely with yields. (For more on the edgy Treasury market, see What Ails Treasuries.)
In today’s climate, the textbook investing move isn’t necessarily the correct one. Consider this: Treasury-bond prices have been rising at the same time gold has been soaring. And despite a moratorium on drilling in deep waters in the Gulf of Mexico, oil prices are as calm as a bay.
Treasuries are the latest paradox. They’ve gone from absurdly overvalued to much of the global community’s investment of choice. Last year’s talk of the dollar’s inevitable collapse and of Treasuries as fish wrap is over. (Note my argument for the investment at that time.) Now, Treasury bonds are seen as blocks of granite. “The last 45 to 60 days, there’s been a global reallocation of assets” in favor of U.S. securities, says Richard Saperstein, managing director of Treasury Partners, a New York City money-management firm that invests in—you guessed it—Treasury debt. “The U.S. dollar is reemerging as the preferred currency at the exclusion of everything else,” adds Saperstein, a 25-year veteran of the bond business.
In San Francisco, Chris Shayne, of BondDesk Group, a source of bond-market information, says the unsettling May 6 flash crash in stocks also favors Treasuries. Since the crash, which lasted all of 20 minutes, individuals have ratcheted up their orders for Treasuries and cut down on buying other kinds of bonds, Shayne says. Even Pimco bond-manager extraordinaire Bill Gross, who in 2008 called Treasuries the most overpriced financial asset on earth, is adding them to Pimco Total Return (PTTAX), the world’s largest mutual fund.
The resurgence of Treasuries partly reflects economic jitters. Slow hiring and tepid corporate spending threaten to dampen the economic recovery. Banks remain reluctant to lend. Interest rates normally drift or fall when credit demand is weak. So expect the yield on the ten-year Treasury to bob between 3% and 4% the rest of 2010, spending more time below 3.5% than closer to 4%.
Who’da thunk it? Given that the Treasury’s bond-making machinery is likely to be running full-time this year and for many years to come, my forecast may strike you as optimistic. During the second week of June, for example, the Treasury manufactured $206 billion of debt, from 13-week bills to 30-year bonds. And when you vastly increase the supply of anything, whether it’s corn, condos or government bonds, its price is supposed to drop.
You may therefore wonder how much longer the Treasury can keep finding takers at such low interest rates. But for now, bond brokers say demand is enormous. That’s what counts because long-term Treasury yields are set in the marketplace, not by the Federal Reserve Board. “We’ve generally become accustomed to regular issuance despite the government’s swelling debt load,” says Justin Hoogendoorn, head bond strategist for BMO Capital Markets in Chicago and a former Northern Trust portfolio manager. BMO is owned by a Canadian bank, and while Hoogendoorn also recommends Canadian bonds, “we don’t really have a lot of clients looking for foreign currency exposure,” he says. “They’re looking for U.S. investments.”
New York money manager Jonathan Satovsky, who handles private accounts, is convinced that foreigners have a lot more faith in U.S. securities than do Americans, who seem to be pessimistic about nearly everything financial. “People in other places perceive their own securities and economies to have weak checks and balances,” Satovsky says. Negativity in the U.S., he says, is most pervasive among those 65 and older. They fear losing savings to hyperinflation, although that has bedeviled savers and pensioners in other nations but not in America—at least not recently.
Clearly, intangibles and value judgments are major factors in Treasury trading. Developments in the past couple of years have, believe it or not, enhanced the Treasury’s reputation as a provider of a reliable, high-quality product. The Treasury’s brand name in government-guaranteed debt securities is what Mercedes is to cars, Harvard and Oxford are to universities, Coca-Cola is to beverages and Google is to search engines.
So in times of stress—and that fairly describes the current situation—a Treasury bond’s resale value is likely to be a little higher and its yield a bit lower than news headlines, Wall Street warnings and apocalyptic chatter in the blogosphere might suggest they should be. If you truly need high income, government bonds don’t provide it. To get 5%, look at pipeline partnerships, utility stocks, conservative real estate investment trusts and investment-grade corporate bonds. But for a secure parking place through the rest of this year, and into 2011, Treasuries will work just fine.