In my blog posting of January 7, 2009, The Next Bubble, Government Bonds I stated the historic low interest rates on U.S. Government bonds, and what would happen when interest rates began to rise.
Fast forward four months, the bubble for US Government bonds has already burst. Interest rates are rising and US Government bond values are dropping, in some case as much as 20%.
It is a moments like this, that I am reminded that I will need to post a blog article on the difference between ‘certainty’ verses ’safety’. Investors often confuse the certainty of a bond maturity date with safety. Bonds offer anything but safety during rising interest rate.
Note the May 8, 2009 headline from the Financial Times
Selected text from that article:
US Treasury yields soared yesterday after a 30-year government bond auction saw poor demand, highlighting the balancing act facing central banks seeking to keep interest rates low while selling record amounts of debt.
The investor appetite for relatively safe government bonds has diminished as US stocks have rallied on signs that the pace of the downturn has slowed. However, the rising rates threaten central banks’ efforts to encourage people and companies to borrow and thereby stimulate growth.
The 30-year Treasury yield rose to 4.30 per cent yesterday from 4.10 per cent the day before after bids at the government auction came at lower prices than expected. The 30-year Treasury is now at it highest level since last November. The rise in bond yields has raised questions about whether the Federal Reserve will step up efforts – which began in March – to keep yields down through direct purchases of government bonds.
“It was a terrible auction,” said Tom Porcelli, economist at RBC Capital Markets. “In an environment where markets are pricing in a better macroeconomic backdrop, it is harder to sell bonds at low yields.”
Chart Data: 30 Year US Government Bond Yield
Additionally, note the cover story in Barrons Ran May 18, 2009 issue,
“The bear market in Treasuries will worsen, because of a glut of government bonds.”
THE BUBBLE HAS BURST.
“We’re talking about U.S. Treasury securities, not housing. At the end of 2008, risk-averse investors poured into Treasuries, driving down yields to the lowest levels in decades. The 30-year Treasury bond fetched less than 3%, and short-term T-bills carried yields of zero.”
“Since then, the economy has shown signs of bottoming, the credit markets are functioning more normally, and the stock market has roared back from its March lows. Treasuries now are in a bear market, while bullish enthusiasm has taken hold in other parts of the credit market, including corporate bonds, municipals and mortgage securities, all of which had fallen from favor late last year. The 30-year Treasury, for instance, has risen to a yield of 4.10% from 2.82% at the end of 2008, cutting its price by 20%.”
“Barron’s called a top in Treasuries and a bottom in the rest of the bond market in an early 2009 cover story (“Get Out Now!” Jan. 5). We weren’t alone in recognizing some of the nutty year-end developments. Warren Buffett highlighted the sale in late 2008 by his Berkshire Hathaway of a Treasury bill for a negative yield. Buffett wrote in Berkshire’s annual letter in February that when “the financial history of this decade is written…the Treasury-bond bubble of late 2008″ may rank up there with the housing bubble of the early to middle part of the decade. – How does the market look now? Treasuries still look unappealing for several reasons. Yields are very low by historical standards, the government is issuing huge amounts of debt to fund record budget deficits, and the massive federal stimulus program ultimately may lead to much higher inflation.”
Again, this is a good time to remind investors that bonds do carry risk, especially when interest rates rise from historic lows. Interest rates have only one direction to move over time, up.
Thank you for reading..
