Why Are Investors Lunging After Low Yielding T-Bills?

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.

Comments

[Q98:]

So it says... absolutely everywhere I look... a regular bandwagon... Santa Claus AND the circus coming to town!

2008 Dec 07 08:58 AM

[Wesley Mouch:]

Like the author implies, a purchase of a 30 year bond at today's rates is equivalent to preparing for the end of the financial system. I do not see any profit potential on the price of the long bonds at this level, and in 5-10 years these rates will appear very unattractive IMHO.

The FED has recently discussed monetizing the debt. In the long run, I feel this is equivalent to cooling your house by keeping your refrigerator door open (note to readers: this does not work as far as I can tell, and the energy losses from the compressor are added as heat to the system). We may feel cooler in the short run, but in the long run the rooms is getting warmer. I have to believe that there is no free lunch, and Federal Reserve activity in the treasury markets feels like just that.

2008 Dec 07 02:24 PM

[AlexR:]

I don't think there are true "investors" buying up 30-year Treasury paper right now, but rather speculators looking for a short-term gain ahead of a possible Fed debt monetization program (print new money to buy government debt). Unless they are hiding it somehow, it does not appear that the Fed has started buying yet: www.federalreserve.gov.../


On Dec 07 02:24 PM Wesley Mouch wrote:
> Like the author implies, a purchase of a 30 year bond at today's
> rates is equivalent to preparing for the end of the financial system.

2008 Dec 07 03:18 PM

[Rob Viglione:]

I've already started shorting 30 year treasuries.think this is the next bubble.

2008 Dec 07 04:05 PM

[k45:]

"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."

I'm confused, or maybe a bit dense. Yields on high quality bonds are pretty low (20 year TVA bonds are yielding 5%, 2029 AAA JNJ bonds are yielding 5.3% and are selling at 120. Those are "values too attractive to ignore"? I can find CD's at those levels.

2008 Dec 07 05:15 PM

[Pipo:]

“Why anyone would give money to the United States government for 30 years at three or four percent is beyond comprehension,” said Jim Rogers

More on Jim Rogers outlook on bonds on:

jimrogers-investments....

2008 Dec 07 05:58 PM

[secmaven:]

"Clogged credit arteries" ??? Sounds like Paulson selling the TARP. Unless the government gets serious about helping the economy from the bottom up those arteries are going to be permanently clogged. Consumers have 1.3 trillion in credit card debt on which they are falling behind at increasing rates each month. The problem is finding sufficient numbers of credit worthy borrowers to "restart" the economy, not lenders willing and able to lend.

2008 Dec 07 09:24 PM

[k45:]

On Dec 07 09:24 PM secmaven wrote:

> The problem is finding
> sufficient numbers of credit worthy borrowers to "restart" the economy,
> not lenders willing and able to lend.
>

Those with good credit are smart enough not to buy on credit these days, they are being conservative. Our economy was built on people spending risky credit. It's going to be hard to rebuild the alleged "robust" economy without the "spend like there is no tomorrow" high risk people.

2008 Dec 08 06:16 AM