Treasuries Prices Remain High

Treasury yields have fallen since the summer, despite a rising risk appetite and strong global capital markets. This is certainly beneficial for the U.S. since the government can borrow at relatively cheaper rates, decreasing the overall cost of the U.S. government’s fiscal agenda.

Why are treasuries holding onto their high dollar price? Most important, the Fed is not expected to raise interest rates until well into next year. While the Fed has much more control over short term rates, they can influence longer term interest rates by purchasing treasury issues along the entire yield curve. Also, financial markets are still riskier relative to 2003-2007 levels. However, the S&P is up from around 900 in July and the 10-year treasury yield is down to roughly 3.5% from a high of over 4% over the summer, which seems to break the growing risk appetite trend that had investors shifting from treasuries to corporate debt and equities earlier in the year.

Unfortunately, treasury yields can not stay low forever, especially when the government often auctions over $60 billion in one week; for example, the treasury is offering $81 billion in 3-, 10-, and 30-year issues next week. With the largest budget deficit in history, a falling dollar, and the imminent decision by the Fed to raise rates next year could mean trouble for treasury bonds. If treasury yields rise significantly next year while the government continues to borrow at record pace, the cost of our fiscal deficit will increase significantly, even if spending stays constant.


http://online.wsj.com/article/SB125743276994630887.html

http://www.marketwatch.com/story/bonds-give-up-gains-after-jobless-claims-fall-2009-11-05?siteid=rss

Group 5