The Truth About the Treasury Bubble

"The buying spree pushed yields to a five-year low even though rising commodity prices and a depreciating dollar were beginning to spark inflation. The co-head of Treasury trading at HSBC Securities USA Inc. has so far been proven right. U.S. government debt has lost 2.8 percent since March 17, including reinvested interest, according to New York-based Merrill Lynch & Co. indexes." - Bloomberg

While many are betting against the US Treasury, calling it "the next bubble", I question their analysis. With the 10-year yielding 3.86%, this is within striking range of last year's 400bp yield, hardly a show of investor fear towards Today's markets. The truth is, however, that investors are NOT as interested in taking risks as the Treasury markets might portray. I believe the movement out of Treasuries to be a simple function of REAL yield, as in order to get a positive real yield investors must look at investment grade corporates, with most, if not ALL Treasuries have zero or negative real yields.

This presents an interesting paradigm shift. With many seeing the movement into corporates as a return to risk-taking by investors, we have begun to hear managers calling for an upward trend in equities. With this artificial show of confidence, I believe those moving into equities will soon learn that the buying confidence simply isn't there, and those individuals stand to lose their newly invested "pre-rally" cash.

The solution? As usual, look abroad. Investors looking to flee the absurdity of negative US Government yields should seek developed sovereign bonds, such as the newly investment grade Brazilian bonds, Euro-zone bonds, and my favorite, Australian bonds (the austrailian economy, backed by HUGE resource reserves, stands to profit hansomely from developing market trade).