August 23rd, 2010 12:15 PM by Nick Rapplean
In an op-ed article in last Wednesday’s Wall Street Journal, “The Great American Bond Bubble” by Jeremy Siegel and Jeremy Schwartz, the authors cited a fact that has haunted my sleep for several nights. “The rush into bonds has been so strong,” they noted, “that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond…is currently selling at more than 100 times its projected payout.”
Just another day in the Wall Street Casino, right? Doesn’t seem so to me.
Why would investors buy bonds that will lose money if held to maturity? For the same reason, the authors argue, that investors bought dot.com stocks at 100 times earnings not terribly many years ago.
So convinced are they, it seems—or perhaps so fearful—that they are willing to disregard laws of economic gravity. “It’s different this time,” they say. What amazes me is how little press this is getting.
The authors also pointed out—citing the work of The Investment Company Institute—that, from January 2008 through June 2010, $232 billion flowed out of equity funds. During the same time period, $559 billion flowed into bond funds. (This is a complex subject, but I get a bit of a chill from the realization that the biggest holder of American debt, China, has been a net seller of Treasury securities this past May and June.)
Now, the yield on the 10-year T-note continued to edge down last week, edging its way to 2.690%. The average rate on Freddie Mac’s 30-year fixed-rate mortgage fell another two basis points to 4.2%. And the refi market, according to the MBA Mortgage Applications Index, is in the process off taking off again. For how long, we don’t know. But it’s hard not to feel that we’re walking on thin ice.
Here’s my current wish list:
I wish the Fed would let interest rates settle where they will, without trying to keep them as low as possible. I wish the government would stop tinkering. I wish we would take seriously our obligation to redesign the financial system that failed this nation and world. And I wish I didn’t have to wake up every day wondering if the bottom is about to fall out of the credit markets.
Ever feel like you’re out meandering in the dark through the jungle and a lot of scary eyes are watching…and mouths licking their lips?
Make no assumptions about the coming few months. The economy has to switch gears, hopefully as gently as possible, and move back toward the possibility that it can indeed recover without first dragging us through another recession.