NEW YORK (CNN/Money) - One feature of the past year has been the steady murmur of pundits pronouncing that the Treasury market is in a bubble. But bond investors are learning that, thanks to their friends in Japan and China, they have little to fear.
Sure, the United States' massive current account deficit (that's the gap in the United States' trade in goods and services with the rest of the world) and the beating the dollar's taken are frightening, but anytime things threaten to get out of hand, there are the Japanese and Chinese central banks busily buying the Treasurys others would sell.
The reason? Japan, worried over its still-fragile economy, is intent on keeping its exporters from getting hurt by a weakened dollar. China, meantime, is committed to keeping its currency pegged to the greenback, despite its massive trade surplus with the United States.
Together, the two countries added $307 billion to their foreign exchange reserves in 2003, far more than ever before. Most of these reserves are dollar-denominated and most of those dollars -- about $190 billion guestimates Lehman Brothers chief U.S. economist Ethan Harris -- are in Treasurys.
"This large inflow is an important prop for the Treasury market, helping keep yields in their current low trading range," wrote Harris in a recent note. "Not only is the inflow large relative to new Treasury supply, it may also help stabilize the market when it comes under pressure. If investors start to shy away from the U.S. market, the dollar comes under downward pressure and the Asian central banks pile in to support the U.S. market."
It's a dynamic that traders appear to have begun to recognize, Harris points out -- lately when the dollar falls, so (contrary to what's usually held in the past) buyers come into the bond market, driving down Treasury yields. The current 10-year yield of 4.03 percent is the lowest since Oct. 3.
The ultimate message is that Treasurys remain a safe asset. Load on up, because whenever things get hairy your buddies in Asia are going to be there to lend a hand.
That's a worrisome development, harking back to the 1990s when investors became conditioned to the idea that Fed Chairman Alan Greenspan would always bail them out.
Uncle Al had ridden to the rescue in the 1987 crash, he'd kept rates super-low in the early 1990s while the savings-and-loan crisis got sorted out, eased up when the Mexican peso crisis was coming to a head in 1995 and, in a move coordinated with other central bankers, slashed rates when the Russian debt debacle threatened to unravel global financial markets.
Steve Kim, now the head of the equity derivatives group at Credit Suisse First Boston, coined a term for this supposed safety valve: The Greenspan put. (Puts are options contracts often employed by investors to protect portfolios from downside risk.) This was ultimately dangerous, said Kim, because it made investors complacent about downside risks to the market.
History showed that Kim was right.
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