Jim Jubak - MSNmoney.com
Nearly nine years after the tech bubble burst in March 2000 and months and perhaps years before we've worked our way through the bubble that burst in 2007, you can see another bubble taking on air.
Treasury market expands
That's right: If you've been convinced that we'd soon see another bubble and that we hadn't learned much from our previous follies, and you've been waiting just to see which asset class would inflate and then go pop, wait no longer. The next asset bubble is here, and it's called the U.S. Treasury market.
These prices aren't far out of line with historic norms, as long as you assume that today's minuscule inflation rate -- a 0.1% annualized rate in December -- is going to stay that low once the global recession is finally over. From 1926 to 2007, Treasury bills yielded, on average, just above the annual rate of inflation for a real return slightly above 0%. Right now, they yield a real return of 0.02%. That's very slightly above zero. Over that same period, the yield on the 30-year Treasury bond was about 3 percentage points above the yield on the three-month bill.
Today, the 30-year bond yields about 3.12 percentage points above the three-month bill.My estimate is that the tipping point will occur later this year -- but not all that much later. and Standard & Poor's are forecasting that the default rate will peak near the end of 2009. At the same time, projects that the yield on 10-year Treasurys will climb 4% by the end of the year, causing the prices of already issued Treasurys to fall. A Bloomberg News survey of the primary Treasury dealers who do business with the Federal Reserve projects a 3.1% decline in the price of the 10-year note in 2009.
That may not seem like much, but with the 10-year note yielding just 2.52%, a drop like that is enough to produce a negative total return from holding a 10-year Treasury.
The combination of the two -- the prospect that the default rate on corporate bonds is near a peak and that the prices of Treasurys are about to fall -- would send money from Treasurys into corporate bonds. That would, of course, accelerate the fall in Treasury prices and the climb in corporate bond prices. Investors who have been through the past two bubbles should recognize this kind of negative feedback as "lower prices produce still-lower prices."