Treasury Tuesdays

There's been a lot of talk lately about a treasury bubble. All of that talk seems to be getting investors' attention:



On the longer end of the curve, notice how prices have moved through both the 10 and 20 day SMA. Also note the strength of the bars and the higher volume on the sell-off. Also note the 10 day SMA has turned lower.



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On the IEFs note the same technical developments as the TLTs -- prices moved through the 10 and 20 day SMA on higher volume. Also note the 10 day SMA has turned lower.



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Note the strength of the sell-off with the high volume mark. Also note prices have moved through the 10 and 20 day SMAs and that the 10 day SMA has moved through the 10 day SMA

So -- what's the reason for the sell-off?

Investors may be glad to see 2008 in the rearview mirror, but in the Treasury market, they already are worrying about 2009.

A chief concern is the amount of issuance on tap. Goldman Sachs Group Inc. puts the amount the U.S. government needs to raise at about $2 trillion, including new issuance and rolled-over securities. Goldman said it could be more, depending on the size of the incoming Obama administration's stimulus package.

The worry: Just as this onslaught of debt hits, investors could turn their noses at the Treasury market's historic low yields and venture instead into riskier assets. That likely would be even more the case once government programs to kick-start financial markets and the economy gain traction.

And as Barron's noted in this week's issue:

THE BIGGEST INVESTMENT BUBBLE TODAY may involve one of the safest asset classes: U.S. Treasuries. Yields have plunged to some of the lowest levels since the 1940s as investors, fearful of a sustained global economic downturn and potential deflation, have rushed to purchase government-issued debt.

The market also has been supported by comments from the Federal Reserve that it, too, may buy long-term Treasuries. - As a result, the benchmark 10-year Treasury note yields just 2.40%, down from 3.85% as recently as mid-November. The 30-year T-bond stands at 2.82%, and three-month Treasury bills were sold last week for a yield of just 0.05%. - Many investors argue it's dangerous to buy Treasuries with such low yields. While a holder can expect to get repaid in

full at maturity, the price of longer-term Treasuries could fall sharply in the interim if yields rise. The 30-year T-bond, for instance, would drop 25% in price if its yield rose to 4.35%, where it stood as recently as Nov. 13. The bear market may have begun Wednesday, when prices of 30-year Treasuries fell 3%. They lost another 3% Friday. - "Get out of Treasuries. They are very, very expensive," Mohamed El-Erian, chief investment officer of Pacific Investment Management Co., warned recently. Pimco runs the country's largest bond fund, Pimco Total Return (ticker: PTTPX). - Treasuries offer little or no margin of safety if the economy unexpectedly strengthens in 2009, or the dollar weakens significantly, or inflation shows signs of reaccelerating. Yields on 30-year Treasuries easily could top 4% by year end.