Tags: Treasurys | T-Bill | recession | debt ceiling | Greek debt

Treasurys Popular Despite Near-Zero Returns

By Michelle Smith   |   Friday, 05 Aug 2011 01:22 PM

Investors, shaken by gloomy global economics, are showing that safety is their main concern by pumping money into investments in U.S. Treasury products. 

Using the word “investment,” however, may be an overstatement, given that this surge is stomping yields to levels where investors are, in many cases, putting money into assets that offer them virtually no gains.

The attitudes of investors have drastically changed in the span of a week. According to Bloomberg, “Last week, stocks surged worldwide while Treasuries and the U.S. dollar plunged after the Greek parliament approved budget cuts and tax increases.”

This week, following the deal by U.S. lawmakers to raise the debt ceiling and under the scepter of increasing worries over debt problems in Europe, the stock market is in turmoil, as is shown by yesterday’s 512-point Dow Jones Industrial Average drubbing, the largest drop in the since 2008, and today’s whipsawing action.

This movement into Treasurys shows profit may not be the current priority, investors are overcome with fear, or they believe there are no other sensible options at the moment.

Whatever the explanation, the surge in demand for U.S. treasuries means that buyers are signing up for lower yields.

The rally in 10-year U.S. Treasuries drove the yield down 0.06 of a percentage point to 3.13 percent yesterday, and rates on three-month bills fell below zero for the first time since December 2008, reported Bloomberg Businessweek.

A five-year T-note pays just 1.26 percent annual interest, down from 1.69 percent in mid-June. Gary Pollack, head of bond trading at Deutsche Bank Private Wealth Management in New York, told the Los Angeles Times that “you only buy bonds at these levels if you think a recession is coming."

And Ward McCarthy, chief financial economist at Jefferies & Co., told the Associated Press, “When you look around the world, there aren't a lot of places that are offering encouragement. This [economic weakness] is a global event.” 

“There is nothing positive about having panicked investors pull their money out of productive investments, increase the value of the dollar and drive down bond yields below the inflation rate,” writes Steven Pearlstein at the Washington Post.

But since it's happening, Pearlstein says that “the Federal Reserve should take this opportunity to sell some of its enormous pile of T-bills into the market.”

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