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Treasury Demand Strong—May Go Longer: Strategist

During the height of the financial crisis, investors flocked to the safety of U.S. treasury debt and many on Wall Street are now calling the top in treasurys. So have bonds turned too risky? Kevin Giddis, managing director of Morgan Keegan and Michael Pond, strategist at Barclays Capital shared their insights.

“There’s still such strong demand in the treasury market if you look around for available investments and we’ve seen the contraction of a lot of spreads,” Giddis told CNBC. “Treasurys continue to be the game in town … there’s still a great demand for treasurys and it may go on a while longer.”

Giddis said bonds have capital structure and their seniority to equity makes them less risky.

“At some point inflation is going to come back, but you’ve still got a window,” said Giddis. “You’re well into next year before this is a big problem. We can peak in yields to the downside in the next 3 to 4 months, but the buyers aren’t thinking 3 to 4 months out, they’re thinking about today. And the buying continues for the balance of this year.”

Investors should build long-term portfolios using municipal bonds, recommended Giddis.

In the meantime, Pond said most risk assets are all going in one direction while bonds are going in the other.

“Supply has increased dramatically over the past year,” said Pond. “We think next year’s supply in the coupon area in treasurys will be even greater than this year. Supply will continue to move up and we think demand for safe haven bid in treasurys will fade if we get the sustained balance in GDP that we expect.”

Pond suggested buying TIPS rather than normal treasurys because they offer very cheap inflation insurance.

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Disclosure:

No immediate information was available for Giddis or Pond.

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