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Are Treasuries The First Bubble To Pop

|Includes: Home Depot, Inc. (HD)

The decision by the Federal Reserve to maintain its basic zero interest rate policy has many in search of bubble formations.  There is a term, hiding in broad daylight that applies here.  While investors monitor equity markets, precious metals and believe it or not even real estate they've glossed over the 800 pound gorilla in the room.  US Treasuries. 

While progress is being made in stemming the deflationary tide and freeing up credit, the recovery remains fragile.  The Federal Reserve recognizes this and Fed Fund futures suggest a tightening should not be a concern until the later half of 2010.   U.S. treasuries are at generational lows in the face of bulging budget deficits and seemingly endless stream of new supply.   Foreign demand for new supply has waned. Frightened retail investors flocked to the safety of treasuries during the meltdown which continues to replace some of that demand. Domestic banks, flush with taxpayer dollars, instead of recirculating those billions are stepping in purchasing treasuries filling the remaining gap.   This cannot continue.  

At some point, rates will rise, and precipitously whether in response to the debasing of the dollar, a whiff of inflation or signs of a sustainable economic recovery.   Chairman Bernanke's legacy most likely will be defined in this next period.  Leave policy too accommodative too long and risk igniting a bout of hyper-inflation and potentially double digit interest rates, aka Fmr. Chairman Volker ( I don't fall into this camp).  Take away the punch bowl too early and risk choking off the economic recovery.  Either way, if not articulate and definitive with policy response, he risks losing both domestic and foreign investor confidence and damaging the greenback further.  

Investors looking to gain access to a recovering housing market may look no further than Home Depot- HD.  Home depot, after cleaning out the CEO office and bringing in fresh blood, has been aggressive in cutting costs and regaining its footing against a hungry Lowe's.   The company shuttered unprofitable store fronts and has been opportunistic in opening new centers.  HD should benefit as the economy and housing continue to stabilize.  In the interim investors get to collect a healthy 3.4% dividend yield.  Earnings are out on November 17 so interested investors should sit in on the conference call.  

As always, investors should conduct their own due diligence and contact their investment advisors before making any investment decisions. 

As a note of full disclosure, I may currently own or look to own in the future securities mentioned here for myself and my clients.