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NEW YORK (CNNMoney.com) --
Treasurys started 2009 on a
down note Friday in the
first trading day of the new
year.
Government-issued bonds are
coming off their best year
since 1995, returning more
than 13.7% to investors in
2008, but analysts say
support for bonds could come
to a crashing end in 2009.
Despite record bond auctions
totaling hundreds of
billions of dollars aimed at
financing the government's
bailouts, Treasurys were led
higher by investor anxiety
about the health of the
overall economy and stock
market.
But analysts expect the
economy to begin its
recovery sometime in 2009.
They say stocks will rebound
this year, restoring
appetite for risk. That
could mean a quick rush to
the exits from what some
analysts consider
artificially high demand for
Treasurys.
"Treasurys
are overbought and perhaps
in a bubble," said Kim
Rupert, fixed income analyst
with Action Economics. "When
the mood changes, it will be
a case of everybody out the
door at the same time."
Rupert said a mass exodus
from the bond market would
be troubling for investors.
As the value of their assets
decline, they will have
difficulty selling them off.
"The market will just
explode, and you can just
hope that you get out in
time," she added.
Other analysts agree, saying
growing government debt
levels amid increasing
appetite for risk could
spell trouble for the bond
market.
"Investor appetite for
government debt has kept
funding rates impressively
low, but continued appetite
is a potential concern in
2009," said Thomas Lee, a
strategist for JPMorgan. "We
believe investors are
beginning to appreciate that
risk aversion has hit
maximum levels."
Lee expects the federal
government's debt to balloon
past the current $10
trillion level on further
bailout actions. Investors'
desire to buy up even more
Treasurys will be tested as
supply continues to expand,
with more record bond
auctions set to finance the
financial rescue programs,
he said.
But some analysts believe
demand for bonds will
remain, even if risk
appetite increases.
Goldman Sachs analyst David
Kostin said in a recent note
that he expects the 10-year
Treasury yield to increase
to 3.6% from 2.67% to close
2008. That's a decent
increase, though barely back
to the 3.91% yield at the
beginning of 2008. He
forecasts a yield of 1% for
the 2-year bond, up from
0.76% at the end of last
year.
Bond prices: Treasurys
continued a furious decline
that ended 2008 on
Wednesday. The bond market
was closed Thursday for New
Year's Day.
The benchmark 10-year fell 1
12/32 to 112 5/32 and its
yield rose to 2.36% from
2.22% from Wednesday. Prices
and yields move in opposite
directions.
The 30-year bond dropped 2
17/32 to 134 12/32 and its
yield rose to 2.78% from
2.67%.
The 2-year bond was down
5/32 to 100 2/32 and its
yield rose to 0.85% from
0.76%.
Meanwhile, the 3-month yield
- widely considered a gauge
of investor confidence -
fell to 0.09% from 0.12%.
Lending rates: The 3-month
Libor fell to 1.41% from
1.42% Wednesday, and the
overnight Libor rate sank to
0.12% from 0.14%, according
to Dow Jones. The British
Bankers' Association did not
disclose Libor rates in
observance of Thursday's
bank holiday in the U.K.
Libor - the London Interbank
Offered Rate - is a daily
average of rates 16
different banks charge each
other to lend money in
London. It is used to
calculate adjustable-rate
mortgages. More than $350
billion in assets are tied
to Libor.
Two market gauges were mixed
to start the new year.
The "TED spread," a measure
of banks' willingness to
lend, slipped to 1.33
percentage points from 1.34
points - the lowest level
for the measure since Sep.
11.
The lower the TED spread,
the more willing investors
are to take risks. The rate
skyrocketed as the credit
crisis took hold in
mid-September, but it has
fallen since the government
put trillions of dollars
into credit-easing programs
in the past several months.
Another indicator, the
Libor-OIS spread, rose to
1.29 percentage points from
1.24 points. The Libor-OIS
spread measures how much
cash is available for
lending between banks, and
is used for determining
lending rates. The bigger
the spread, the less cash is
available for lending. |
