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Treasuries: Still Not a Buy

The U.S. is the largest issuer of debt. The Federal Reserve is the largest holder of our government’s debt… and China is the second largest. While the Fed plans to wind down its purchases of Treasuries through its quantitative easing at the end of this month (at least that’s what’s reported), China has been a net seller of U.S. government debt for the past five months (though there is some debate about whether they are routing purchases elsewhere).

And while the two largest holders of U.S. government debt are scaling back, and in spite of yet another warning from ratings agencies and the ongoing debt ceiling battle, Treasuries are rallying. The two-year note has gained for the past nine weeks (the longest winning streak since 2008), and the ten-year yield recently hit this year’s low (when Treasury prices move up, yields fall).

But I don’t look at the moves in the Treasury market as a signal to buy (particularly not long-term debt). While Treasuries have gained in light of weak economic data, extremely low rates still make them unappealing. And that was true even before the recent rally sent yields to historic lows.

At last weeks Morningstar Investment Conference, Pimco’s Bill Gross reaffirmed his negative outlook on Treasuries (and his position that the 30-year bull-run in bonds is over). There are alternatives to Treasuries that are far more attractive, and investors “pocket(s) will basically be picked” if they hold them. And by the way, he doesn’t have “any regrets” about missing out on the recent rally.

Managers at First Pacific agree: “We would not lend money long-term to a fiscally irresponsible entity with unattractive real yields”.

The bottom line, according to First Pacific: “It would have been speculative to have invested in Treasuries because even at 50 or 60 basis points ago, they still didn’t offer value”.

Consider a proxy for long-term Treasuries, iShares Barclays 20+ Year Treasury Bond Fund (TLT): while recent gains have resulted in a technical buy signal, shares have corrected off overbought territory three times in the past month. And last week’s activity has the fund approaching overbought yet again.

And the same goes for intermediate-term Treasuries. iShares Barclays 7-10 Year Treasury Bond Fund (IEF) recently signaled a buy, but is clearly overbought.

For an investment opportunity, I would look outside the U.S. Take a look at iShares JPMorgan USD Emerging Markets Bond Fund (EMB). Shares are in a clearly established upward trend, and the fund is among top performers based on relative strength within a diversified global investment portfolio. And the fund offers exposure to emerging market government-issued bonds (top holdings are in Philippines, Turkey, Russia and Brazil).


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