- NEW YORK (Reuters) - Investors have been blindsided by one financial catastrophe after another over the last 18 months, but throughout the tumult, the government bond market has been their friend.
Until now.
A brutal drop in long-dated Treasury prices has caught even the best money managers off guard -- in some cases wiping out as much as 60 percent of the gains they booked in last year's huge rally in U.S. Treasuries.
Blindsided by one financial catastrophe after another... kinda agree.
09 December 2008, Tips: How To Make 13 cents In 3 Months!!!!
- Yields on two-, 10- and 30-year securities declined last week to the lowest levels since the Treasury began regular sales of the debt after a report showed U.S. employers eliminated jobs in November at the fastest pace in 34 years and the Fed contemplated buying U.S. debt as the recession deepened.
President-elect Barack Obama said Dec. 6 he will boost investment in roads, bridges and public buildings to create or preserve 2.5 million jobs in the biggest public-works spending package since the 1950s.
The return to investors is 0.005 percent for the three- month bills, with a $10,000 bill selling for $9,999.87. The return to investors is 0.3 percent for the six-month bills, with a $10,000 bill selling for $9,984.83.
A day later, 10 December 2008 Zero! US T-Bills Fall To Zero!
- "There's still a ton of fear," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. "People are now paying the government to take their money. Something is wrong."
The following day, 11 December 2008, Bill Gross Says T-Bill At Zero Is Overvalue And Has No Returns
No returns! Those two words says it all!
The article on Reuters continues...
- The Vanguard Group, Fidelity Investments, T. Rowe Price and Hoisington Investment Management have seen their government funds down anywhere between 10 percent and 30 percent, as record amounts of debt flood the market to pay for the swelling budget deficit.
What's stunning about the portfolio declines is the swift plunge in Treasury prices within a short period of time despite the Federal Reserve's buyback purchases intended to hold down interest rates. Benchmark 10-year Treasury yields have surged to levels not seen in more than six months, resulting in meaningful losses for many portfolios.
The 10-year T-note and 30-year Treasury bond are down 8.58 percent and 24 percent, respectively, in terms of price for the year to date.
"If I were clairvoyant and knew we were going to have a sell-off of this magnitude, I would've been all in cash, but I'm not," said Van Hoisington, whose flagship Wasatch-Hoisington U.S. Treasury Fund is down more than 20 percent.
To be fair, not all Treasury-oriented funds like Hoisington's represent an expression of a firm's macro view of economic growth or lackthereof. Some bond funds, such as the Vanguard Extended Duration Treasury Index Institutional, hold Treasuries for actuarial reasons.
SOME BULLS SMILE THROUGH THE PAIN
Even so, the losses are massive. Some of the rise in yields and slide in Treasury prices is due to investors' appetite for riskier fare like stocks, junk bonds and corporate debt, which have been performing well on signs the recession is easing.
Indeed, for much of 2008 and earlier this year, investors piled into U.S. government debt during the credit crisis, sending yields to historic lows and triggering talk of a bubble similar to that of the Nasdaq's Internet-led bubble, which expanded in the late 1990s and burst in March 2000.
But there also have been concerns about America's long-term financial health, which has set in motion a huge domino effect -- leading money managers such as Hoisington to stay bullish on Treasuries.
"We ain't seen nothing yet in terms of the gazillion amount of Treasuries coming to fund our stimulus programs," said Dan Fuss, vice chairman of Loomis Sayles, which oversees more than $107.7 billion in assets.
UNITED STATES' AAA VULNERABLE
On May 21, Moody's Investors Service said while it is comfortable with America's AAA debt rating, it is not guaranteed forever against the backdrop of its deteriorating fiscal position. That helped exacerbate market fears that the United States remains ever more vulnerable to lose its coveted triple-A rating with its need to borrow $2 trillion -- or 14 percent of the country's total economic output and more than twice the record of 6 percent set in 1983.
That also has set off a chain reaction, notably with the so-called "bond vigilantes." Veteran Wall Street strategist Ed Yardeni coined the term "bond vigilantes" to describe the huge appetite for yield of investors in the 1980s, who got burned in the '70s; these investors demanded higher yields to compensate for perceived risks of inflation and budget deficits.
The phenomenon seems premature to some investors in Treasuries.
"If zero growth is gonna result in inflation, it's a new economic paradigm as far as I'm concerned," Hoisington said.
His fund was up an astounding 37.77 percent in 2008.
"We do not have a forecast of runaway growth, nor does the Fed," added Brian Brennan, manager of the T. Rowe Price U.S. Treasury Long-Term bond fund, which is down nearly 11 percent. Conversely, his fund was up more than 23 percent last year.
The standout of the crowd, however, is Vanguard. Its Extended Duration fund, which is down over 33 percent so far this year, "is not an expression of our macro call," Ken Volpert, head of the Taxable Bond Group at The Vanguard Group, where he oversees about $200 billion in assets, told Reuters.
Volpert said the fund, which was up 55.52 percent in 2008, is primarily intended for pension plans and other institutional investors that want to closely match long-term liabilities with a portfolio of U.S. Treasury securities of similar long-term duration. He added that credit conditions have improved dramatically and confidence has come back into the markets and economy to feed the belief in recovery.
Even so, "somebody lost their shirt ... 33 percent is no small chunk of change," said Jeff Tjornehoj, research manager at Lipper Inc, a funds research firm owned by Thomson Reuters.
On NYTimes, Treasuries and Stocks, in a Role Reversal
- Many investors who moved to the sidelines in the debacle of 2008 have begun to return to the stock market. “Investors don’t like to be left behind in any rally,” said Henry Kaufman, the veteran Wall Street economist. “The juices are beginning to work, and that’s a good thing.”
Even in a week when General Motors, a former icon of American industry, went into bankruptcy, the stock market took the bad news in stride.
Still, recent reversals in the Treasury market appear to underscore the continuing fragility of the stock market and of the global economy. Rising government bond rates could choke off an incipient recovery, particularly in the housing market, where mortgage rates are linked to Treasury yields.
With the government forced to sell enormous quantities of bonds to finance its fiscal stimulus and financial rescue operations, Treasury yields have risen sharply since the beginning of the year, and prices, which move in the opposite direction, have plummeted
..........
Amid gains like this, the turmoil in the Treasury market is glaring. Individual investors who bought Treasury securities and government bond funds last year to buffer their portfolios have seen the price of their holdings decline sharply (though the government guarantees the full value of Treasury bonds that are held to maturity).
Those losses shouldn’t have been entirely surprising, though. After gaining so much in value, Treasuries were bound to fall, many analysts warned, and fall they did.
The decline was caused by several factors, Dr. Kaufman said. These include anticipation of an economic recovery, the increasing supply of government debt, the mounting fiscal deficit, and skepticism about the Federal Reserve’s huge intervention. “The market is testing the Fed’s intentions and desires,” he said.
Here are the 6 month chart of UST (10-Year) and USB (30-Year). The plunge in UST is more drastic.
Here are the one year charts.
No comments:
Post a Comment