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Treasuries: The “Cleanest Dirty Shirt”

To be called the “cleanest dirty shirt” by PIMCO’s Bill Gross hardly sounds like a compliment, but for the investing world, it’s enough.

US Treasuries look like the least unappealing option as the market is shifting, very decidedly, into a risk-off mode. And in a flight to safety, money is moving to the center…and right into US government debt. And that flight is fast enough that Treasuries are hardly keeping up with investor demand. The Treasury has sold $903 billion of notes and bonds so far this year, and investors have bid $3.19 for each dollar issued. And on May 23rd, when the Treasury sold $35 billion in two-year notes, the demand was the second-highest since 1992 (when the government began collecting data).

And with record demand comes record low yields. Bond prices and yields move inversely, so as demand drives prices up, yields fall. Last week the yield on the 10-year Treasury fell to a historic low below 1.50%…the previous low of 1.55% was reached in November 1945. And 30-year yield fell to 2.50%…the lowest level since 1953.

There’s nothing attractive about low yields. And as I’ve said, many times, that’s an issue with US government bonds. But the rush into Treasuries is not about yield. It’s about preserving cash. And the markets are clearly willing to chase yields to record lows.

And these record low yields are a pretty good gauge of the fear that is pervading the markets. And an even better gauge is the fact that the US has the 11th lowest 10-year yield. That yields are collapsing in other “safe havens” is an indicator of just how intense the uncertainty is.

Needless to say, the US has a debt problem, and we are veering toward a “fiscal cliff”, but when risk is off the table and the tone in the market turns defensive, a lack of yield is accepted in exchange for the security of the least dirty piece of laundry in the sovereign debt market.

And looking at proxy for Treasuries, iShares Barclays 20+ Year Treasury Bond Fund (TLT), recent gains have reinforced a buy signal for the fund, which is up 7.5% so far this year.


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