The Latest Bubble: Treasuries

Demand for Treasuries has reached the ‘bubble” phase seen among technology stocks in 2000 and real estate six years later, according to David Rosenberg, chief North American economist at Merrill Lynch & Co.

“The 10-year note yield is now firmly below the 3 percent threshold and this next leg down in yield will undoubtedly represent the classic mania-turn-to-bubble phase that quite plausibly sees an overshoot to or even through the April 1954 lows of 2.3 percent,” New York-based Rosenberg said in a research note today. Bloomberg

Well, we cannot go below zero on the fed funds rate...but they have other tricks up their sleeve, according to Fed heads:

“There are three key strategies for a central bank to stimulate the economy when short-term interest rates are fixed at zero or near zero. The first is to attempt to lower longer-term interest rates and boost other asset prices by managing market expectations of future policy actions. Specifically, a credible public commitment to keep the funds rates low for a sustained period of time can push down expectations of future short-term interest rates and lower long-term interest rates and boost other asset prices. Such a public commitment could be unconditional, such as ‘maintained for a considerable period’ or it could be conditional, such as ‘until financial conditions stabilize.’ Atlanta Fed

Investors are looking for answers to what is driving the the rally, and this one is as good as any:

Jim Sarni, managing principal at Payden & Rygel—an investment firm in Los Angeles that manages more than $50 billion in assets—calls the flight to quality into high-priced Treasury bonds a persistent disconnect between market fundamentals and market valuations on one hand, and people’s desperation to avoid risk on the other. He notes how quick the Treasury has been to abandon certain strategies designed to spark lending and restore confidence in favor of new programs, without fully explaining to the public—or possibly even thinking through—how the proposed measures would actually work.

“As investors, we’re all being bombarded by information that scratches the surface [in terms of trying] to solve the liquidity problems in the market,” Sarni says. “Nothing is gaining traction because none of the details are known, and that’s manifesting itself in people being skittish, which is driving them to the safest thing out there until there’s more certainty about what’s going on.”

Blogger extraordinaire Gregor Macdonald offers us his assessment, based on last weeks machinations:

So let’s acknowledge that Bernanke got a two-fer for his GSE purchase last week as it triggered a convexity trade long into Treasuries, yes?

And lets not forget the ISM number....

In the U.S., the Institute for Supply Management said its index of factory activity fell to 36.2 last month from 38.9 in October.

Business Week fleshes out Gregor’s theory a bit more, but it is amazing that traders who were cocksure of inflation just 6 months ago have pulled such a 180. And as bad as things are here in the U.S., the dollar is clearly flashing bad things everywhere else:

...the dollar’s strength is telling you there are probably much bigger problems outside the U.S., says DiGaloma. Foreign central banks still rely on the greenback as their reserve currency and in Europe, the prospect of economic contraction is more frightening. One in four jobs in London’s economy is in the shrinking financial services sector, compared with a much smaller dependence by the American population, he says. “In European countries in general, that seems to be where a lot of financial engineering was taking hold. Banking was a bigger part of their economy than it is here,” DiGaloma says Business Week

But the moves in the ten-year are amazing....shorting Treasuries, via the UltraShort Lehman 20+ Trsy ProShares (TBT-AMEX), has been a debacle.
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Ten-Year Bond Yields...wow

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Update: TechTicker ran a piece on Wednesday, December 3rd on the “Bubble”

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If Rosenberg is right we will likely test the 1954 lows of 230 basis points. Investors looking to short Treasuries might eventually have their day, but for now, patience is required.

And the price action, in everything, is beginning to boggle my scrambled mind. But we have much more data to wade through this week, as David Gaffen and Simon can attest:

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Unraveling the Mystery Behind U.S. Treasury Prices
Business Week

Treasuries In Bubble Phase, Merrill’s Rosenberg Says
Bloomberg

Bernanke: More Rate Cuts ‘Certainly Feasible’
WSJ

How should we think about the monetary transmission mechanism?
MacroBlog-Atlanta Fed

August 18th
The Great Debate: Inflation vs. Deflation
1440 Wall Street

Closing (Bond Market) Comments December 01 2008
Across the Curve

Check out Gregor’s Blog, he always offers food, for thought.
Gregor.us
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UltraShort Lehman 20+ Trsy ProShares (TBT) The investment seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the Lehman Brothers 20+ Year U.S. Treasury index. The fund normally invests at least 80% of assets to investments that, in combination, have economic characteristics that are inverse to those of the index. It also typically invests in taking positions in financial instruments, including derivatives that should have similar daily return characteristics as twice the inverse of the index. The fund is nondiversified.
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The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

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