Wikinvest Wire

More Treasury bubble talk

Friday, December 26, 2008

In today's commentary at Bloomberg, Michael Sesit consults with the "Bond King" on what many call the biggest and baddest bubble of them all - U.S. debt.

To Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., the answer is yes. “Treasuries have some bubble characteristics, certainly the Treasury bill does,” Gross said earlier this month. “A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk? There is no return.
The bursting of a bubble in the U.S. government bond market would be a perilous event.

First, it would cause large losses for millions of investors, especially U.S. retirees who regard Treasury securities as the ultimate safe investment.

Second, it might threaten Treasuries’ status as the global “risk-free asset” and would damage the international stature of the U.S. Foreigners, who own about half of all Treasuries, might stop funding the country’s growing trade and budget deficits without an increase in U.S. interest rates.

Finally, a busted Treasury-market bubble could undermine the dollar’s global reserve-currency status, which in turn would spell higher U.S. interest rates, undercutting economic growth.
Big and bad and likely to burst someday...


Mathlete said...

If the Treasury bubble bursts, do rates go from 0% to 5%? They'd still wouldn't be that high.

Why is 0% yield a bad deal? If deflation is 3%, its a 3% yield. Much better than a negative return in stocks or corporate bonds.

Anonymous said...

Zimbabwe strike a note?
if treasuries pop you will see inflation some only have nightmares about

Anonymous said...

Mathlete: Isn't the point that a 0% yield is no better than the "return" you get by holding the cash under your mattress or burying it in your backyard? And if the grocery store won't accept T-Bills (but will accept Federal Reserve Notes, i.e., cash) as payment for canned tuna and spam we may all soon be dining on, what possible reason do I have for buying a 0% T-Bill?

So even if you believe a T-Bill is exactly as safe as cash, the liquidity preference pushes a rational person in favor of cash.

But as for the risk-free assumption -- that's an interesting question: clearly there is a non-trivial risk of U.S. government default on its public debt; but if that happens, what does that do to the dollar? In other words, maybe one can recognize that T-Bills are not actually risk-free, while still believing that they're not actually any RISKIER than cash...?

Anthony J. Alfidi said...

All it takes to pop this bond bubble is for one apparatchik in Beijing to report to his boss that US $500B won't be enough to stop riots in Tibet . . . and then they start selling more Treasuries than they had anticipated selling.

Anonymous said...

T-bills are better than burying cash in your backyard because you don't have to hire guards to watch over, say, $10M buried in your yard.

Anonymous said...

This might interest you:

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