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World of Worry Makes Treasury Play Hard to Derail

Low-yielding, high-priced Treasurys seem "bubblicious" to some, but to other investors they still represent opportunity at current levels.

It's clear that the Federal Reserve has distorted the true-value levels of interest rates, throwing many investors' GPS out of whack.

Yet, with most of the developed economies submerged in solvency and debt issues, the notion of a significant selloff at this time in safe harbor Treasurys seems remote. (Read More: Fixed income market outlook.)

The "fiscal cliff" issues — frequently discussed on CNBC for many weeks — don't seem to change the low interest-rate bias currently priced into the market. There are several reasons.

First, the uncertainty of resolving the fiscal cliff he scheduled onset of automatic tax hikes and spending cuts are on Jan. 1 s responsible for recent selling pressure in the equity complex, a positive for buying Treasurys.

Second, no matter how the fiscal cliff issues get resolved, it seems a safe bet that some tax rates will be going up. In the current weak growth environment in this country, higher taxes are another reason to sell stocks and buy Treasurys. (Read More: Tax Uncertainty and Munis.)
Finally, many traders believe when the Fed's "Operation Twist" ends in December, the central bank may resume direct Treasury purchases. The strong 30-year auction Nov. 8 reflects that sentiment.

The anxiety of being long Treasurys at these levels is a real emotion. The real issue though is how long global investors and foreign central banks will continue to sponsor overspending by the U.S., resulting in many years of trillion-dollar deficits.

The answer that to that, of course, is unclear, but it is clear that the political issues in Japan, the ultimate economic direction in China, insolvency in southern Europe and the $16-trillion dollar debt, along with mediocre growth and job creation in the U.S., are compelling reasons to look for a 30-year bond to possibly trade with a 2 percent yield.

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