Treasuries at ‘Bubble’ Phase of Rally, Merrill’s Rosenberg Says
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By Daniel Kruger
Dec. 1 (Bloomberg) -- Demand for Treasuries has reached the ‘bubble’’ phase seen among technology stocks in 2000 and real estate six years later, according to David Rosenberg, chief North American economist at Merrill Lynch & Co.
“The 10-year note yield is now firmly below the 3 percent threshold and this next leg down in yield will undoubtedly represent the classic mania-turn-to-bubble phase that quite plausibly sees an overshoot to or even through the April 1954 lows of 2.3 percent,” New York-based Rosenberg said in a research note today.
Even though Treasuries have entered “overvalued territory,” yields may fall further and remain near record lows as the Federal Reserve, households and institutional investors increase purchases as the economy worsens, Rosenberg wrote. The U.S. economy entered a recession a year ago this month, the National Bureau of Economic Research said today.
Fed policy makers may say after their Dec. 15 and 16 meeting that they’ll hold short-term interest rates at low levels for an extended period and begin working more closely with fiscal authorities, financing an expanded budget deficit through the purchase of Treasury securities, Rosenberg said. He wasn’t immediately available to elaborate on the report.
The 30-year bond yield fell as much as 16 basis points to 3.2795 percent today, according to BGCantor Market Data. That’s the lowest level since at least 1977, when the government began regular sales of the securities. The 10-year note yield touched 2.78 percent, the lowest since 1955 as measured on a monthly basis, while the two-year note yield reached 0.9014 percent.
‘Looming Deflation Battle’
Treasuries of all maturities returned 5.4 percent in November, the best returns since November 1981, when the 10-year note yield was 14.57 percent and U.S. government securities gained 7.8 percent, according to Merrill Lynch bond indexes.
“Investors should operate under the assumption that the Fed is going to embark on a new course of balance sheet expansion to mitigate the downside risks to the macro outlook and fight the looming deflation battle,” Rosenberg wrote. “This is bullish for long bonds.”
Financial futures on the Chicago Board of Trade indicate a 70 percent likelihood the Fed will lower its target rate for overnight lending between banks to 0.5 percent from 1 percent in two weeks. The remaining balance of bets are for a rate reduction to 0.25 percent.
Bernanke Speech
The Fed said Nov. 25 it will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies and set up a $200 billion program to support consumer and small-business loans.
Speeches Fed Chairman Ben S. Bernanke made in the period following the 2001 recession, when investors became concerned the economy might experience a bout of deflation, serve as a map of strategies the central bank might employ, Rosenberg wrote.
Fed interest-rate cuts brought the target rate to 1 percent in June 2003 from 1.75 percent in 2002. The 10-year note rallied to 3.07 percent in June 2003 from a yield of 5.47 percent in April 2002 on the concern that prices might fall amid sluggish growth.
In November 2002, Bernanke, then a governor on the Fed’s board, said that central bankers had many avenues of policy open to them to curb deflation, including mandating ceilings on the yields of government debt, the purchase of risk assets, such as corporate bonds, a combination of securities purchases and tax cuts from fiscal authorities.
‘Fed’s Balance Sheet’
The Treasury could also combat deflation through purchases of real or financial assets using the proceeds of government debt bought by the Fed, Bernanke said.
Bernanke, at the time, also faulted Bank of Japan officials for insufficiently creative or vigorous attempts to curb drops in prices during the 1990s.
The Fed and Treasury have introduced at least 20 new measures or programs aimed at jolting the economy and unfreezing the credit markets, including the Term Auction Facility which auctions cash loans to banks and an expansion of the discount window to primary dealer investment banks without commercial banking charters, Rosenberg said.
The Fed has increased the size of its balance sheet, the tally of assets held by the central bank, to $2.11 trillion from $924.2 billion on Sept. 10, prior to Lehman Brothers Holdings Inc. bankruptcy filing.
To contact the reporter on this story: Daniel Kruger in London at [email protected]
Last Updated: December 1, 2008 13:32 EST
Email | Print | A A A
By Daniel Kruger
Dec. 1 (Bloomberg) -- Demand for Treasuries has reached the ‘bubble’’ phase seen among technology stocks in 2000 and real estate six years later, according to David Rosenberg, chief North American economist at Merrill Lynch & Co.
“The 10-year note yield is now firmly below the 3 percent threshold and this next leg down in yield will undoubtedly represent the classic mania-turn-to-bubble phase that quite plausibly sees an overshoot to or even through the April 1954 lows of 2.3 percent,” New York-based Rosenberg said in a research note today.
Even though Treasuries have entered “overvalued territory,” yields may fall further and remain near record lows as the Federal Reserve, households and institutional investors increase purchases as the economy worsens, Rosenberg wrote. The U.S. economy entered a recession a year ago this month, the National Bureau of Economic Research said today.
Fed policy makers may say after their Dec. 15 and 16 meeting that they’ll hold short-term interest rates at low levels for an extended period and begin working more closely with fiscal authorities, financing an expanded budget deficit through the purchase of Treasury securities, Rosenberg said. He wasn’t immediately available to elaborate on the report.
The 30-year bond yield fell as much as 16 basis points to 3.2795 percent today, according to BGCantor Market Data. That’s the lowest level since at least 1977, when the government began regular sales of the securities. The 10-year note yield touched 2.78 percent, the lowest since 1955 as measured on a monthly basis, while the two-year note yield reached 0.9014 percent.
‘Looming Deflation Battle’
Treasuries of all maturities returned 5.4 percent in November, the best returns since November 1981, when the 10-year note yield was 14.57 percent and U.S. government securities gained 7.8 percent, according to Merrill Lynch bond indexes.
“Investors should operate under the assumption that the Fed is going to embark on a new course of balance sheet expansion to mitigate the downside risks to the macro outlook and fight the looming deflation battle,” Rosenberg wrote. “This is bullish for long bonds.”
Financial futures on the Chicago Board of Trade indicate a 70 percent likelihood the Fed will lower its target rate for overnight lending between banks to 0.5 percent from 1 percent in two weeks. The remaining balance of bets are for a rate reduction to 0.25 percent.
Bernanke Speech
The Fed said Nov. 25 it will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies and set up a $200 billion program to support consumer and small-business loans.
Speeches Fed Chairman Ben S. Bernanke made in the period following the 2001 recession, when investors became concerned the economy might experience a bout of deflation, serve as a map of strategies the central bank might employ, Rosenberg wrote.
Fed interest-rate cuts brought the target rate to 1 percent in June 2003 from 1.75 percent in 2002. The 10-year note rallied to 3.07 percent in June 2003 from a yield of 5.47 percent in April 2002 on the concern that prices might fall amid sluggish growth.
In November 2002, Bernanke, then a governor on the Fed’s board, said that central bankers had many avenues of policy open to them to curb deflation, including mandating ceilings on the yields of government debt, the purchase of risk assets, such as corporate bonds, a combination of securities purchases and tax cuts from fiscal authorities.
‘Fed’s Balance Sheet’
The Treasury could also combat deflation through purchases of real or financial assets using the proceeds of government debt bought by the Fed, Bernanke said.
Bernanke, at the time, also faulted Bank of Japan officials for insufficiently creative or vigorous attempts to curb drops in prices during the 1990s.
The Fed and Treasury have introduced at least 20 new measures or programs aimed at jolting the economy and unfreezing the credit markets, including the Term Auction Facility which auctions cash loans to banks and an expansion of the discount window to primary dealer investment banks without commercial banking charters, Rosenberg said.
The Fed has increased the size of its balance sheet, the tally of assets held by the central bank, to $2.11 trillion from $924.2 billion on Sept. 10, prior to Lehman Brothers Holdings Inc. bankruptcy filing.
To contact the reporter on this story: Daniel Kruger in London at [email protected]
Last Updated: December 1, 2008 13:32 EST
