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US Treasuries in bubble ?

Last week was a downbeat week for stock markets when major world stock indices fell by more than 3% in one week. At same time, treasury market was going up with yield on 10 year US treasuries touching 3.08 at one point. There are multiple factors in play on why investors are willing to buy treasuries when everyone knows that US deficits are unsustainable and if not for US $ as "reserve currency", US case is worse than Greece. So why treasuries keep going up (and yield going down) ? Here are some factors:
  • Flight to safety - investors have to park their money. With Euro and Yen in trouble and no other alternative (except Gold), governments as well as big investors have to park their money and at this moment there is only one alternative which is US treasury
  • US $ status us world reserve currency
  • AAA rating of US government - US has never defaulted in recent history
  • When stocks are going down, 3% assured return is not bad
  • Despite stocks going down in recent weeks, investors are still up by about 50% from lows of March 2009 and they are taking profits out and parking in safe place which is US treasury
  • Most importantly, inflation is nowhere on horizon and hence US fed to going keep interest rates low
Despite all these valid factors, IMO, US treasury bull run is over. When yield on 10-year treasury touches below 3%, it's time to take out money out of treasury (or related mutual funds) since yields are going back above 3.5% in next few months (that means value of treasury would go down). Here is why I think why:
  • US fed is going to raise rates in next 12 months - that means smart investors would start taking money out of treasuries in 6 months causing it to fall
  • US economic recovery is going to gain some speed by end of this year
  • Euro problems would be behind us means investors across world would start looking at Euro as alternate "reserve currency" again
  • US deficits are going up with wars, stimulus and other spending. At some point investors would realize that in 10 years or so, US would have same problems as Europe demanding higher yields on treasuries
Finally wall-street reform is almost over. Most likely President Obama would get final bill to sign before 4th of July weekend giving him another victory which I am sure he needs it for Nov elections.

As far as stock recommendations for this week goes, check out SD ($6.3), RDN ($8.8) and PNX ($2.25)

Have a great week

/Shyam

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