Jittery Investors Dump Stocks for Low-Yielding Treasurys
Increasing distrust in the stock market is accelerating investors into Treasurys, even as the government floods the market with billions in debt with no end in sight.
After suffering through several lackluster auctions, recent Treasury offerings have sparked strong investor interest, including a 10-year sale on Wednesday that featured the biggest demand since 1995 for a 10-year note offering. A 30-year auction Thursday generated less interest but wasn't as bad as feared.
Other recent offerings on the shorter end of the yield curve have done very well.
Analysts say the auction response breaks into two dynamics: a belief that inflation is not a near-term concern, and a lack of confidence in stocks generated by some less-than-stellar economic news.
"I find it shocking anyone would buy a 10-year Treasury yielding 3 percent," said Michael Pento, chief economist for Delta Global Advisors in Parsippany, N.J. "I think it's more emblematic of fear and perhaps an idea that the economy might be rolling over."
Wednesday's 10-year auction drew an interest rate of 3.125 percent. In open trading Thursday, the 10-year was yielding about 3.30 percent.
Bond experts such as Bill Gross, co-chief investment officer at Pacific Investment Management Co., or Pimco, had said recently that the 10-year yield would need to be closer to 4 percent to attract investor interest.
But with stocks seeming to hit a peak following a 40 percent rally off the March lows, Treasurys have become more attractive to investors who think the market won't move higher until economic data points start showing real signs of improvement, rather than just beating diminished expectations.
"The interest in Treasurys will persist as long as there are no inflation fears in the marketplace and as long as stocks appear unattractive," said Peter J. Tanous, president and director of Lynx Investment Advisory in Washington, D.C. "Conversely, what will turn it around is if all of a sudden as a result of the sheer volume of Treasury sales the market starts to choke.
"That will cause some concern, and if the green shoots start to look like twigs and branches and it looks like the economy is recovering, that will exacerbate the inflation trade."
Yields on Treasurys, which move opposite prices, might be expected to jump as the influx of debt supply pushes down prices.
That hasn't happened yet, though many analysts doubt the current trend will continue.
"Markets move in multiple directions depending on timeframe. What's clearly been going on in the short term is risk aversion," said Mike Larson, analyst for Weiss Research. "What's happening is once you got both stocks and (Treasury) yields up to those highs, yields were high enough that short-term (bond) traders were willing to step in."
Larson thinks the trend won't last as the government continues unabated to release more debt into the marketplace.
In addition to the 30-year auction, the Treasury announced plans Thursday to sell $32 billion in reopened three-month bills and $30 billion in reopened six-month bills Monday.
And there has been talk this week of the White House unleashing a second round of fiscal stimulus on top of the $732 billion already announced, a move that will generate more debt supply on the market and provide another disincentive to bond prices.
"The size of these auctions is simply massive and they're getting bigger with time. If we truly do enact the stimulus package, where's that money going to come from?" Larson said. "The long-term picture's still bearish for Treasurys, even though we've seen some stability in auction demand as we see people looking to park money."
That doesn't necessarily mean stocks will rose, though.
"Maybe the stock portion of your portfolio should be lower than it has ever been," Tanous said. "Instead of 60 percent maybe it should be 35 or 40 percent."
As for Treasurys, Larson said that while he is advising investors to stay away from the long end of the yield curve, he has taken profits on holdings in the ProShares Ultra Short 20+ Year Treasury ETF. The fund pays double the inverse of investments that track the Lehman Brothers 20+ Treasury index, meaning that it rewards moves lower in bond prices.
Larson and other advisors, though, still think the trend is lower for bond prices.
"You're looking at a tremendous tsunami of Treasury issuances," Delta's Pento said. "If you dilute the number of anything, it's price has to go down. I don't know who has the confidence and comfortability in buying a 10-year Treasury yielding 3.4 percent, but I think it's absolutely insane."