U.S. Households May Lend Treasurys a Hand

By MIN ZENG The Treasury market faces an onslaught of supply this year. It could get help in dealing with it from an unexpected corner: U.S. households. The recession has turned once-spendthrift U.S. consumers into savers who could well become a buying force in the Treasury market as they opt for safety. Increased domestic demand will come as a relief for the government amid rising concerns that foreign investors, major players in gobbling up U.S. Treasurys over the past few years, may slow their purchases. For foreign investors, who already hold more than half the roughly $5 trillion in Treasurys outstanding, current low returns make U.S. government debt unattractive. They also face the risk that the Fed's efforts to reflate the economy could undermine the dollar, reducing the value of their Treasury holdings in local currency terms. U.S. households, however, battered by the swings in stock markets, are likely to rediscover the attractions of holding government bonds. That will help keep yields low, meaning the government can continue to borrow cheaply to fund its more than $700 billion economic stimulus programs. "The rise in savings rates is a good development and should be supportive to the Treasury market," said Jim O'Neill, head of global economic research at Goldman Sachs. Mr. O'Neill expects Treasury yields to remain relatively low, with the 10-year Treasury yield to be capped at 2.75% in the first half of the year. Tuesday, the 10-year yield stood at 2.301%, with the price up 2/32 point, or $0.625 for every $1,000 invested. Yields move inversely to prices. For sure, U.S. investors have a variety of places to park their savings. But over the past five to 10 years, households have underinvested in liquid assets such as Treasurys, said James Caron, head of U.S. interest-rate strategy at Morgan Stanley. Now with stock prices world-wide tumbling, they are likely to increase the share of Treasurys in their portfolios as a way to preserve capital. The personal savings rate, which dipped below zero as recently as 2005 and has hovered around that level for the past few years, rose to 2.4% in October and 2.8% in November. Economists expect the rate to rise to about 3% to 5%, or even higher, in 2009, among the sharpest reversals seen since World War II as consumers, shaken by the extent of the current financial and economic crisis, radically retrench. Goldman Sachs predicts the 2009 saving rate could be as high as 6% to 10%. The annual personal savings rate averaged around 10% during the recession of the early 1980s and was at 7% during the recession of the early 1990s.