Tuesday, June 29, 2010

Treasuries Continue to Surge – 10-Year Bond Yield Falls Below 3 Percent

Investors continue to show a seemingly endless appetite for US Treasuries. The yield on the ten-year bond fell below 3 percent on Tuesday for the first time since April 2009, when markets were still recovering from financial shock. Since the Greek debt crisis this spring and the corresponding policy moves by the EU and ECB, investors looking for a safe haven have been moving away from Euro based assets and into Treasuries.

An additional surge in buying is likely happening this week for a couple of reasons. A year-long ECB liquidly program is coming to an end this Thursday where European banks will have to begin to repay €442 billion. There is some market apprehension that this may help trigger another credit crunch. Also on Thursday, some index-linked funds will begin to automatically dump Greek bonds from their portfolio, following June downgrades by Standard & Poor's.

Under normal circumstances, ten-year bond yields this low would be a strong sign that the market is pricing in deflation or a significant slowdown in economic activity. Assuming that the current modest recovery continues to build steam, it is quite likely that the Treasury market will be in for a significant reversal. Yields will need to rise in order to reflect long term inflationary expectations.

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