US Treasurys Losing Favor As Investors Seek Profits
After fleeing to the safety of US Treasurys, investors are moving back into stocks and corporate bonds in search of something else—profits.
"A lot of money has been hiding in Treasurys," says Mike Larson, an analyst at Weiss Research's Money and Markets newsletter. "Now there's a better tone in the stock market."
Last month, many mutual funds and institutional investors piled into Treasurys, pushing yields down to zero for short-term bills and barely above two percent for longer-term debt. The feeling then was that it was better to keep what you had than to lose more money in stocks.
But with the new year, the sentiment has changed.
"You're seeing some bond investors make the judgment that things are a little better elsewhere," Larson says. "Why am I on the short end lending money for free and why am I on the long end when I'm accepting 2 percent for 10 years?"
With a huge government debt auction slated for later this week, the move out of Treasurys is likely to escalate—though that doesn't necessarily mean good news for stocks.
Bond prices slid again Tuesday as traders were scared away by the looming auction of $166 billion of debt this week, including an $8 billion offering of Treasury Inflation Protected Securities, or TIPS.
The influx of supply, necessitated by aggressive government rescue and stimulus programs, is apt to push value down for Treasurys and has investors looking for alternatives.
"The bigger issue that I see is the massive amount of money-borrowing—or in the case of the Fed money-printing—to support the economy," Larson says.
Indeed, 10-year Treasurys fell nearly a full point in price Tuesday to hit three-week lows. And even though that meant a mild gain for yields, which move in the opposite direction of prices, it still kept them remarkably low and far from an enticement especially with the boom in supply coming.
Exchange-traded funds, or ETFs, that track bond prices also are lower.
The iShares Barclays 20+-year Treasury Bond fund is off about 9 percent over the past two weeks, while the company's iBoxx High Yield Corporate Bond fund has moved in the opposite direction, gaining more than 18 percent since early December.
Still, that hasn't translated to stock market gains.
While the market posted a nice run last week, the rally faltered on Monday and was up modestly on Tuesday. There's widespread sentiment that until the economy stabilizes, stocks will continue to be unpredictable.
That could mean a continued surge of interest in other instruments, such as corporate and municipal bonds, both of which have been gaining as Treasurys have been losing.
"From where I sit right now I do not see people selling bonds en masse and putting money into equities," says Dennis P. Barba Jr., a professor at the Weatherhead School of Management at Case Western Reserve University. "I think people will be more apt to take risk going from Treasurys and into corporates, going from something that yields zero to something that yields 3."
Video: Kevin Ferry of Cronus Futures Management discusses the bond trade.
As the government conducts its massive debt auctions a slew of corporations are rolling out major bond issues that are expected to draw crowds.
A $10 billion FDIC-backed bond sale Monday from General Electric's finance armdid well, and no fewer than four more deals were on the docket Tuesday from Devon Energy, Brown-Foreman, Tyco International Finance and TransCanada Pipelines.
Despite a 35 percent drop in 2008, corporates bounced back in December after the Federal Reserve cut interest rates to zero, in a specific move to push traders out of government debt and into riskier assets that offer higher yields.
That poses issues for the government, though, as it looks for ways to finance its bailout and stimulus moves. The low yields could spell more trouble for Treasurys.
"The longer-term question is, can we continue to rely on the willingness of strangers to finance this recovery package?" Larson says. "My guess is that answer is no."
At the same time, while stocks are unlikely to move in a straight line, neither will government bonds and Treasury bills. Some bond recovery is likely, but the consensus thinking is that 2009 is likely to see a considerable drop in interest for government debt.
"We've come so far so fast in the very near term. It's likely Treasurys will reverse some of these losses in the near term, but going forward I sure as heck wouldn't be long on the bond," Larson says. "I do think that to some degree the bubble we saw recently has likely popped."