Why Are Investors Lunging After Low Yielding T-Bills?

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By Eric Roseman

Despite signs that several segments of credit continue to improve, namely in the mortgage-backed and investment grade corporate bond market, the rest of the complex remains hostage to nervous money and the accelerated flight to safety in December.

U.S. Treasury bonds, the only asset in the world appreciating along with the dollar and the yen since mid-July, have skyrocketed in value since November 18. The yield on the benchmark 10-year Treasury now fetches just 2.54% - the lowest yield since 1954.

Even more incredible is the yield now offered by short-term government bills. It's possible that yields might even turn negative before the day is through. The last time T-bill yields turned negative was in the 1930s; a negative interest rate implies investors are paying the government to park cash and not the other way around.

Evidence of heightened investor fears reached a nadir Friday morning with 30-day and 90-day U.S. Treasury bills yielding only 0.10%, or ten basis points - the lowest such yield since the 1930s. And six-month T-bills now yield a meager 0.20% - also in the record books.

The great paradox about the credit crisis at this stage is how investors continue to lunge after super low yielding T-bills and T-bonds when an entire gamut of fixed income markets - many with implicit government guarantees - are yielding north of 7%. Investors are indeed pricing in a serious deflation.

The U.S. 30-Year Treasury bond now yields just 3.04%, also trading at a 53-year low. Why would someone give the government money for 30 years at these rates? Short of a full-blown Depression, which I don't think will occur, long-term bonds are the most overvalued asset in the world leading up to over $1 trillion dollars worth of Treasury bond issuance in 2009 and probably more in 2010. The only reason why an investor would buy this paper now is because of imminent financial Armageddon.

Meanwhile, investors are paid to take risk. And the values now in high quality investment grade corporate bonds, agency bonds, TIPs and convertible bonds are just too compelling to ignore. These markets all crashed starting in mid-September but have started to recover nicely over the last three weeks while stocks gyrate like a yo-yo. A 7% yield today seems mighty sweet.

Financial Armageddon is still a possibility. Global central banks and governments have spent trillions since August 2007 attacking clogged credit arteries, but only with limited success. At some point, however, I truly believe central banks will restart credit markets again as coordinated policy finally begins to work. Credit markets will unclog.

Tired of trying to pick a bottom in the stock market? I am. I have no idea where stocks are heading from one day to the next amid intense volatility. But I do believe high quality fixed-income securities should be purchased at these attractive levels for long-term investors. The values are too attractive to ignore.

Also, assuming stronger credits have stabilized at this point, investors can buy this sector without the dizzy volatility associated with common stocks, which ultimately lead to ulcers anyway as new lows are violated following every rally since last October.