Are bonds pricing in another panic?

By Paul R. La Monica, editor at large


NEW YORK (CNNMoney.com) -- The last time the yield on the benchmark U.S. 10-year Treasury was below 3% was in April of last year, arguably the crescendo of investor fears about the state of the global economy.

Well, don't look now, but the yield on the 10-year is getting perilously close to 3% again. At one point Tuesday morning, it stood at around 3.15%, down from about 3.7% as recently as the beginning of May.

paul_lamonica_morning_buzz2.jpg
chart_ws_bond_10yearyield.03(2).png
The yield on the 10-year Treasury is approaching its lowest level since April 2009. Some think that fear could drive rates below 3%.
Is buying stocks still a good bet?
  • I buy stocks regularly
  • I make other investments now
  • Only when they look like a bargain
  • Never invested in stocks

Investors have been busy buying U.S. Treasurys recently due to concerns about Europe and the potential impact the debt crisis there will have on global growth. (Bond yields fall when prices rise.)

Even though Europe's woes are likely to lead to some problems in the U.S., investors still generally view the dollar and bonds as safe havens. Hence, the strong demand despite the fact that few think the U.S. economy is a bastion of strength.

But how much longer can this last? Will investors continue to pile into Treasurys? The bond market faces a big test this week as the Treasury Department will be conducting a series of auctions. Most notably, $21 billion worth of 10-year notes will be up for grabs on Wednesday.

Quincy Krosby, chief market strategist with Prudential Financial in Newark, N.J., said she thinks there will be healthy demand for these Treasurys because investors are still worried about the global economic outlook.

"Once investors believe economic growth is showing meaningful traction, rates will head up. But until then, investors are more worried about the whiff of deflation than inflation," she said, adding that a 10-year yield below 3% is not out of the question.

"At this stage, nobody expected yields to be this low at this point," she said.

Still, some investors talk of a bond bubble. Concerns about Europe leading to another downturn in the U.S. may be overdone, which should lead to an eventual flight to the exits in the Treasury markets, and back to stocks and other riskier assets.

"There's an increased probability of a slowdown in growth. But Treasury yields are now priced to a level that's forecasting a double-dip recession. We still don't believe that's likely," said Tim Stringfellow, president of Frost Investment Advisors in San Antonio.

Stringfellow noted that the Federal Reserve is likely to keep short-term interest rates near zero for some time, and that could help prevent a double dip scenario.

But some argue that the Fed's interest rate policy, combined with a series of purchases of longer-term Treasurys, is precisely the reason why long-tem rates won't head higher anytime soon.

"Until the government gets out of the business of underwriting credit to keep rates low, yields will stay below 4%. In a truly free market, they could be closer to 5%. You'd expect yields to go higher, but it will take more time," said Subodh Kumar, a market strategist based in Toronto.

To be fair, several Fed officials have recently come out to suggest that the central bank will eventually need to raise rates in order to keep inflation pressures in check.

One of the most vocal Fed members in this so-called inflation hawk camp, Kansas City Fed president Thomas Hoenig, even went as far as to say that the Fed needs to raise rates to 1% by this summer.

If the market truly believed the economy was getting better, and that Fed chief Ben Bernanke was ready to put the brakes on inflation, long-term rates would probably have ticked up already. That clearly hasn't happened.

"The bond market didn't blink when the inflation hawks talked about raising rates. The 'extended period' for low rates is likely to be extended," said Steve Van Order, chief fixed income strategist with Calvert Funds in Bethesda, Md., referring to the term the Fed has used to describe how much longer it thinks rates should stay near zero.

So the Fed's in a pickle. If it keeps rates low, the bond market is likely to interpret that as a sign the central bank is still worried about how tenuous the recovery is.

But at some point, won't investors - especially big foreign holders of Treasurys such as China - grow impatient with the Fed and tire of having money parked in bonds that yield a little over a paltry 3%?

Prudential's Krosby pointed out that the fact that utility stocks have held up well as of late - the Dow Jones utilities average (DJU) was up Monday even as the broader market fell - could be a sign of investors looking elsewhere for steady income. Many utilities pay dividends that sport yields higher than the 10-year.

Still, as long as there are more doom-and-gloom headlines about turmoil in Europe and fears about the spillover effect on the U.S. economy, Van Order said anything's possible in the Treasury market. Rates could fall further even though yields are hardly attractive.

"On the one hand, you have to think, 'Do I really want to own a government bond yielding this little for that long?' Fundamentally, you'd think they are too low," Van Order said. "But the overseas jitters and bad employment report are keeping people in Treasurys."

- The opinions expressed in this commentary are solely those of Paul R. La Monica.  To top of page

Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.80%3.88%
15 yr fixed3.20%3.23%
5/1 ARM3.84%3.88%
30 yr refi3.82%3.93%
15 yr refi3.20%3.23%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET

Sections

Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.