Next Bubble May Be in Treasuries

But the rest of the bond market is attractively priced

By Nick McMaster, Newser Staff

Posted Jan 6, 2009 8:15 PM CST

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Next Bubble May Be in Treasuries — In this 2001 file photo, an oversized $100 "Patriot Bond" is on display at the Treasury Department in Washington. (AP Photo)

As the credit and stock markets collapsed, investors rushed to Treasuries as the safest possible bet. But the rush to safety could be fueling a bubble, writes Andrew Bary for Barrons. Yields have been plummeting, with 10-year notes at 2.4% and three-month bills selling last week for 0.05%. The bonds will still pay out at maturity, but prices could fall steeply by year’s end.

The Fed’s super-low interest rates and looming fiscal stimulus, and the possible recovery of the economy by mid-2009 all make a reckoning in Treasuries likely. Bary recommends playing the other aspects of the bond market instead. AAA 30-year municipal bonds now offer 5.25%—double the yield of 30-year T-bonds—while the average junk bond, while risky as ever, offers a 20% yield.
(More Treasury Department stories.)

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