Investors, worried about the faltering economy and turbulent stock market, have flocked to US Treasury bonds. But the stampede has pushed Treasury yields so low that their investment value is practically non-existent.
The two-year Treasury note, for example, is currently yielding around 1.60%. If you take inflation into account--currently between 2% and 3% annually--that means you're actually losing money.
"We just don't find any value at all in Treasurys at these levels," said Joe Patire, managing director of YieldQuest Advisors. "And those buying Treasurys may not feel that there is any value either. This may just be a place for investors to hide."
Recent massive Treasury rallies are a testament to the safety premium carried by government-backed bonds. These rallies were sparked by concerns about the fragile economy and extreme investor aversion to risky debt.
On Monday there was yet another Treasury rally, sparked by concerns that an exhaustive Bush administration proposal to overhaul financial regulation will have no impact on the credit crisis.
But, unlike stocks, which rise in value during rallies, Treasurys become less enticing as investments the more they rally. This is because prices and yields move inversely.
"The main factor sending yields lower right now is the market's expectations for more rate cuts," said Larry Rothman, a senior analyst for DebtVisions. "The market has baked in its expectations for more rate cuts."
Traders have pushed the 2-year yield lower in a clear signal that the market expects the Federal Reserve to build on recent massive rate reductions and cut the overnight Fed funds rate, now at 2.25 percent. The 2-year yield sometimes trades as a proxy for the Fed funds target.
The problem for Treasury buyers is that, even in a phase of diminished investor expectations, few people are enthusiastic about loaning the government money for a full two years in exchange for a mere 1.6 percent or 1.3 percent gain.
"Figuring out where the 2-year yield is going to go is a hard call," said Joel Marver, a Treasury technical analyst at Thomson Financial. "We would need to know how the credit crisis is going to play out with all its crazy twists and turns. But when you are in nosebleed territory, it is hard to know what will happen next."