Wednesday, January 07, 2009

The race to dump US Treasuries...

...and thereby collapse the US Dollar is about to begin.

MONDAY, JANUARY 5, 2009
BARRON'S COVER
Get Out Now!
By ANDREW BARY

The bubble in Treasuries looks ready to pop, sending prices on government debt sharply lower. But just about every other corner of the bond market beckons -- and could provide competitive returns with stocks, even if the equity markets have a strong 2009. (Video)

THE BIGGEST INVESTMENT BUBBLE TODAY may involve one of the safest asset classes: U.S. Treasuries. Yields have plunged to some of the lowest levels since the 1940s as investors, fearful of a sustained global economic downturn and potential deflation, have rushed to purchase government-issued debt.

The market also has been supported by comments from the Federal Reserve that it, too, may buy long-term Treasuries. - As a result, the benchmark 10-year Treasury note yields just 2.40%, down from 3.85% as recently as mid-November. The 30-year T-bond stands at 2.82%, and three-month Treasury bills were sold last week for a yield of just 0.05%. - Many investors argue it's dangerous to buy Treasuries with such low yields. While a holder can expect to get repaid in full at maturity, the price of longer-term Treasuries could fall sharply in the interim if yields rise. The 30-year T-bond, for instance, would drop 25% in price if its yield rose to 4.35%, where it stood as recently as Nov. 13. The bear market may have begun Wednesday, when prices of 30-year Treasuries fell 3%. They lost another 3% Friday. - "Get out of Treasuries. They are very, very expensive," Mohamed El-Erian, chief investment officer of Pacific Investment Management Co., warned recently...


The article included this listing of current yields of various types of bonds. As you can see, US Treasuries are hardly an attractive option compared to all the rest.



In the past, since US Treasuries were considered uber-safe, most foreign nations and institutional investors were willing to have a large quantity of them, even if yields weren't all that great. Now, however, it is clear to even the most dense officials that there is not a snowball's chance in heck that the US can back all the debt it has sold, and so the low yields plus the fact that they aren't considered uber-safe anymore will cause most nations and institutions to dump US Treasuries like hot potatoes.

And so it begins.

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