Monday, January 5, 2009
Twin Risks for Treasurys in Year Ahead
--oversupply --inflation concern By DEBORAH LYNN BLUMBERG Investors may be glad to see 2008 in the rearview mirror, but in the Treasury market, they already are worrying about 2009. A chief concern is the amount of issuance on tap. Goldman Sachs Group Inc. puts the amount the U.S. government needs to raise at about $2 trillion, including new issuance and rolled-over securities. Goldman said it could be more, depending on the size of the incoming Obama administration's stimulus package. The worry: Just as this onslaught of debt hits, investors could turn their noses at the Treasury market's historic low yields and venture instead into riskier assets. That likely would be even more the case once government programs to kick-start financial markets and the economy gain traction. Treasury prices would fall and yields rise, making it much more expensive for the government to raise the funds needed to help the economy. On Friday, the first trading day of the new year, Treasurys already were under pressure as stocks gained, with the benchmark 10-year yield rising 0.16 percentage point to 2.417%. Ironically, success in helping to heal financial markets and the economy will make it more difficult for the government to fund its efforts, though there may be some help from the Federal Reserve, which is considering buying longer-dated Treasurys as a way to support the economy. Fed Chairman Ben Bernanke alluded to this support in a speech he gave as a Fed governor in 2003: Buying Treasurys in the open market "reduces the present and future interest costs of the government and the tax burden on the public," he said. But with the printing presses already running, all the cash flooding into the system is another worry weighing on bond investors' minds as it could lead to rampant inflation and weaken the dollar. That would be another disincentive for foreign investors, who hold more than half of the over $5 trillion in U.S. government debt outstanding. "So far, people are willing to buy our Treasury bonds, and everything is great," said Jim Kauffmann, head of fixed income at ING Investment Management. "The dollar, though, is going to look fragile against the yen, Swiss franc, and some of the healthier developing economies," Mr. Kauffmann said, "and that could turn people off from dollar-based assets." The market faces its first supply test of the new year this week, with the Treasury expected to auction some $50 billion in three- and 10-year Treasury notes and 10-year Treasury Inflation-Protected Securities, on top of billions of dollars in Treasury bills. Others are worried that even trillions of dollars of taxpayer money won't be enough to stop the economy from suffering a deep and lengthy recession. Already historically low yields could fall further. In 2008, bond-equivalent yields on T-bills pushed toward zero, and the three-month T-bill's bond-equivalent yield was negative at one point -- meaning buyers took a loss on capital.