Treasury Bonds may have a
fast and furious
decline this year
decide the time has
come to test the
stock market waters
David Goldman, CNNMoney.com
staff writer 2009-01-02.
NEW YORK (CNNMoney.com) -- Treasurys started 2009 on a down note
Friday in the first trading day of the new year.
Government-issued bonds are coming off their best year since
1995, returning more than 13.7% to investors in 2008, but analysts
say support for bonds could come to a crashing end in 2009.
Despite record bond auctions totaling hundreds of billions of
dollars aimed at financing the government's bailouts, Treasurys were
led higher by investor anxiety about the health of the overall
economy and stock market.
But analysts expect the economy to begin its recovery sometime in
2009. They say stocks will rebound this year, restoring appetite for
risk. That could mean a quick rush to the exits from what some
analysts consider artificially high demand for Treasurys.
"Treasurys are overbought and perhaps in a bubble," said Kim
Rupert, fixed income analyst with Action Economics. "When the mood
changes, it will be a case of everybody out the door at the same
Rupert said a mass exodus from the bond market would be troubling
for investors. As the value of their assets decline, they will have
difficulty selling them off.
"The market will just explode, and you can just hope that you get
out in time," she added.
Other analysts agree, saying growing government debt levels amid
increasing appetite for risk could spell trouble for the bond
"Investor appetite for government debt has kept funding rates
impressively low, but continued appetite is a potential concern in
2009," said Thomas Lee, a strategist for JPMorgan. "We believe
investors are beginning to appreciate that risk aversion has hit
Lee expects the federal government's debt to balloon past the
current $10 trillion level on further bailout actions. Investors'
desire to buy up even more Treasurys will be tested as supply
continues to expand, with more record bond auctions set to finance
the financial rescue programs, he said.
But some analysts believe demand for bonds will remain, even if
risk appetite increases.
Goldman Sachs analyst David Kostin said in a recent note that he
expects the 10-year Treasury yield to increase to 3.6% from 2.67% to
close 2008. That's a decent increase, though barely back to the
3.91% yield at the beginning of 2008. He forecasts a yield of 1% for
the 2-year bond, up from 0.76% at the end of last year.
Bond prices: Treasurys continued a furious decline that ended
2008 on Wednesday. The bond market was closed Thursday for New
The benchmark 10-year fell 1 12/32 to 112 5/32 and its yield rose
to 2.36% from 2.22% from Wednesday. Prices and yields move in
The 30-year bond dropped 2 17/32 to 134 12/32 and its yield rose
to 2.78% from 2.67%.
The 2-year bond was down 5/32 to 100 2/32 and its yield rose to
0.85% from 0.76%.
Meanwhile, the 3-month yield - widely considered a gauge of investor
confidence - fell to 0.09% from 0.12%.
Lending rates: The 3-month Libor fell to 1.41% from 1.42%
Wednesday, and the overnight Libor rate sank to 0.12% from 0.14%,
according to Dow Jones. The British Bankers' Association did not
disclose Libor rates in observance of Thursday's bank holiday in the
Libor - the London Interbank Offered Rate - is a daily average of
rates 16 different banks charge each other to lend money in London.
It is used to calculate adjustable-rate mortgages. More than $350
billion in assets are tied to Libor.
Two market gauges were mixed to start the new year.
The "TED spread," a measure of banks' willingness to lend, slipped
to 1.33 percentage points from 1.34 points - the lowest level for
the measure since Sep. 11.
The lower the TED spread, the more willing investors are to take
risks. The rate skyrocketed as the credit crisis took hold in
mid-September, but it has fallen since the government put trillions
of dollars into credit-easing programs in the past several months.
Another indicator, the Libor-OIS spread, rose to 1.29 percentage
points from 1.24 points. The Libor-OIS spread measures how much cash
is available for lending between banks, and is used for determining
lending rates. The bigger the spread, the less cash is available for