Talk of a bubble in U.S. Treasury bonds simply won’t die.
For example, a top story making the rounds online Tuesday was an article at The Street penned by Jeff Nielson wondering how Treasury bond prices can be so high when there is so much supply. His theory is that Federal Reserve chief Ben Bernanke is “secretly (and illegally) counterfeiting U.S. dollars — and using those bogus dollars to prop up the U.S. Treasury market.”
Controversial stuff, for sure.
Today I was on Chuck Jaffe’s MoneyLife show talking about ETFs and a listener asked if iShares Barclays 20+ Year Treasury Bond (NYSEArca: TLT) is a buy, sell or hold. [Inverse Treasury ETFs for Rising Interest Rates]
Of course, some long-term investors use Treasury ETFs for asset allocation to anchor the bond side of their portfolios.
Treasury bears say that yields are so low that investors aren’t being compensated for the risks of holding Treasuries. These risks include inflation, higher interest rates, the U.S. deficit and elevated debt-to-GDP figures.
However, investors have been talking about a bubble in Treasury bonds for literally years, and yet prices keep rising and yields keep falling to new record lows. Yields on the 10-year note are hovering around 1.6%.
‘You could get a lot less in yield’
Barry Ritholtz, chief executive officer of FusionIQ, and David Rosenberg, chief economist and strategist at Gluskin Sheff, addressed the idea of a bond bubble in an interesting Bloomberg Television appearance posted Tuesday.
Rosenberg doesn’t think there is a bubble in U.S. Treasuries. Current low yields signal the aftermath of a credit bubble, deleveraging and deflation. He also wonders how there can be a bond bubble when it remains so widely detested.
“You look at the 10-year yields around the world and the U.S. is somewhere in the middle so it’s hard to say this is a full-blown bond bubble when there’s so much more to go,” added FusionIQ’s Ritholtz. “The U.S. is in the middle of bond yields for industrialized nations. You could get a lot less in yield.”
For example, German 10-year bunds are yielding about 1.5% and 10-year Japanese government bonds are yielding less than 1%.
In the U.S., low Treasury yields are “fair warning that the Fed is in the market impacting it,” Ritholtz added. “It’s a little bit of a warning the economy is slowing down.”
He also compared the Treasury market to the dot-com bubble in terms of investor psychology.
“If you’re honest with yourself, you have to admit bonds are going higher and yields are going lower,” Ritholtz told Bloomberg Television. “You have to admit it’s likely to end badly the way the dot-coms ended badly, and if you’re really honest you can admit you have no idea when the hell that’s going to happen.”
iShares Barclays 20+ Year Treasury Bond
