December 12, 2008

Treasury bonds reflect market worries

Returns on U.S. Treasury bonds have skyrocketed this year, as investors have flocked to the market backed by the U.S. government.

Merrill Lynch & Co. chief North American economist David Rosenburg said the market for government bonds had reached a bubble with prices unrealistically high due to overwhelming demand.

Returns on 30-year U.S. Treasury bonds hit 27 percent this year, while 10-year and two-year Treasury bonds have hit 12.6 percent and 5.8 percent, respectively, The Dallas Morning News reported Friday.

While demand has soared, yields have collapsed. A recent Treasury auction found demand for short-term bonds with zero yields.

Investors want to ride out the storm in Treasuries, said Howard Simons, a bond strategist at Bianco Research.

Demand acceleration came when the government started pushing money in the banking system, in November, said Mac Pado, a market analyst at Cantor Fitzgerald.

When money from the $700 billion financial bailout bill started reaching banks, the banks turned to buying government bonds, to improve their debt-to-equity ratios, Pado said.

And it's not just U.S. banks, but banks in Asia and Europe are trying to recapitalize too, and they are buying U.S. Treasuries, he said.