Is this bubble bursting?
Filed Under: Hot Fudge
US Treasuries are typically seen as the investor’s flight to safety. For the conservative, buying US Treasury bonds offer a safe and secure way to keep your cash, but others run here for safety in tumultuous times as these. The US Treasuries have been in a bull market for over 25 years until last year there was a dramatic drop in the yields, and we actually witnessed investors willing to lend the government money at 0%.
Now when we begin to see irrational investment decisions as regards to the purchase of an asset, it screams of a bubble. We’ve witnessed a pop in the tech bubble, financials, and real estate, and the question has always been “what’s next?”, well once again it’s the US Treasuries. Typically in good times, people sell stuff to make payments on other things, like buy a car, pay for the kids’ college, pay taxes etc. In the case of a bubble bursting, many times, people just realize it’s crazy to have your money invested in this asset class. However a reader kindly pointed to me in a previous post that it is highly unlikely that this bubble will burst, and I quote
“If everybody decided to sell all of those treasuries and dollars … what would or COULD they buy ?
the yuan can’t handle it and wouldn’t want to be pushed up that high. no currency buy itself can handle it. no equity market or sovereign bond market can handle it.
nobody wants the responsibility of all that investment. the problem in the world right now is too much “wealth” and no safe place to put it. (which reminds us how sad it is that poverty and resource-wars still plague the planet)
so reasons the sell off hasn’t started:
1. if anybody flinches the game of confidence collapses and an amazing amount of “wealth” is destroyed in a sell off. nobody can step away from the table (except us little guys). any move has to be done very slowly and gradually.
2. there’s nothing to sell this stuff off into “
Indeed this is partly true, where will the trillions of dollars be put into? While I may not have the answer to that question, I will think that another bubble will be created somewhere else, it is currency and it will always have something to flow to.
With the market collapse witnessed in 2008, the government has been radically issuing out bonds which the Fed has been buying by printing money out of thin year, pretty much the guys in the US mint are working over time now. If the bond market were a real market there should be concerns of over supply in the market, and prices should fall and yields should go up. The big question is for how long will our Asian friends continue to buy US bonds? Though the continuous purchase may suit their agenda, but are the really ready to risk the loss of a great deal of wealth so as to continue their economic agenda? Or are those dollars just counted as lost dollars, as part of the expenses to buoy their economies? How does locking your money up for 10 to 30 years in order to get 3+ % interest?
In the past 2 weeks we have seen the treasuries in a holding pattern, slowly trending to the downside. The Ten-year Treasury bonds declined today, pushing the yield up one basis point to about 2.47 percent, the Thirty-year Treasury bonds are slowly following. Typically when the equity market collapse, investors run to buy bonds, however in the past couple of days we’ve seen market drops that were not followed by subsequent bond purchase, what does this tell us concerning investor psyche?
Maybe there will be a huge rebound in 2009 that no one expects, because with a falling dollar, if people do begin to sell US Treasuries, where would all that money be parked at? There exist great values all around, maybe it’s not all over yet for world economies, or there may be the launch of a new dimension in market economies.
Happy Trading,
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