Treasury Bonds: Low Yield, High Popularity

November 24, 2008 08:00 AM
by Anne Szustek
The stock market’s volatility is driving investors toward Treasury bills, a traditionally safe investment. But the heavy demand is playing into lower yield on these government-backed bonds.

Bond Is the Word

What has been the stock market’s loss is working out to be a gain for Treasury bond investors. Investors looking for a safe—if not high-return—haven for their money are rushing to buy government-backed bonds, “breaking records for that market,” writes Agence France-Presse.

The spate of T-bond buy-ups helped push prices for 30-year bonds up by $8.50 on Thursday.

Slowly but surely, Treasury bonds have been delivering. While S&P 500 stocks have lost an average of more than 40 percent since January, over the same period, the Lehman Brothers Aggregate U.S. Treasury Index has yielded a 7.4 return to investors. Over this month, Treasury bonds have paid back 2.8 percent, “while S&P 500 investors lost 4.8 percent,” reports CNNMoney.

But with security comes lower payouts. And on the back of a flurry of bond purchases, yields on T-bonds have been falling. On Wednesday, the yield on a 30-year T-bond dropped from 3.91 percent to 3.49 percent—what the Los Angeles Times’ Money & Co. blog calls “an astounding one-day decline for a long-term bond.”

As of midday on Friday, the yield on a 10-year Treasury bond, currently a popular choice, was at 3.09 percent, reports BloggingStocks. Economist Richard Felson told BloggingStocks that he sees this dipping to as low as 2.65 or 2.75 percent by the end of the second quarter of 2009. In a stronger economy, this would work out to a zero rate of return, once inflation is factored in.

Opinion & Analysis: T-bond market offers guarantee of at least some return

“But,” as BloggingStocks writes, “as investors know, these are not normal times. Inflation is trending lower, and there is now concern among some economists about the appearance of deflation.”

This would work out to a higher real yield for investors—2 percent or higher for buyers of 10-year T-bonds, BloggingStocks points out. This at face value seems a meager payout, but in this economy, investors are willing to take what they can get.

Treasury bonds are one thing that’s guaranteed to have investments come out ahead during this economic downturn.

“In this climate, investors don’t care about yield, their primary concern is capital preservation,” Felson was quoted as saying by BloggingStocks. “And despite the increase in debt the United States is likely to record over the next two years, the lowest risk investment remains U.S. Treasury notes. It’s quickly becoming a sort of electronic mattress, the way savers used to store money in mattresses decades ago.”

Reference: Investing Guide


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