Leon Cooperman: ‘Bubble’ Swelling in US Treasury Market

Friday, 07 Sep 2012 07:38 AM

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U.S. Treasury holdings are “a misplaced asset class” and a bubble that should be avoided, said Leon Cooperman, CEO of Omega Advisors.

The European debt crisis and a cooling Chinese economy have sent investors worldwide scrambling to the U.S. Treasury this year, pushing yields down to around 1.5 percent and even lower earlier this year.

The yield moves inversely from the price of a bond, and falling yields often represent frothy demand, especially in the case of the U.S. Treasury.

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

“I think the bubble that exists today is in U.S. government bond yields,” Cooperman told CNBC.

“There’s a very pessimistic price structure built into many equities, and the bond yields, in my opinion, are being subsidized by the government, so I want to be out of U.S. government bonds. I think they’re a mispriced asset class,” Cooperman said, adding he is not selling off all of his Treasury holdings but will rather look for investments elsewhere.

“I’m not short them because I recognize the financial repression policies being followed by the Fed, and I want to be in a select number of equities. And I can find many, many equities that are attractively priced.”

The Federal Reserve is due to meet next week to address interest rates and discuss the possibility of rolling out a new round of quantitative easing (QE), under which the Fed buys assets like Treasury holdings or mortgage-backed securities from banks, pumping the financial system full of liquidity in a way that pushes down interest rates across the economy to spur recovery.

Past easing measures from the Fed have kept stock prices rising.

Fed Chairman Ben Bernanke has suggested that the economy needs to show not only improvement but sustained improvement to keep stimulus measures at bay.

“[T]he costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant,” Bernanke said in prepared remarks in a recent speech.

“Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

The government will release its August jobs report on Friday and economists are expecting lackluster results.

A CNNMoney survey of economists finds the economy likely added a net 120,000 jobs in August.

In July, the economy picked up 163,000 jobs, but the unemployment rate increased to 8.3 percent. The economists polled expect the unemployment rate to remain unchanged in August.

Experts say 120,000 new jobs doesn’t bode well for President Barack Obama.

“The soft economic environment that we’re having, is not going to be good for any incumbent,” said Sam Bullard, Wells Fargo senior economist, CNNMoney reported.

“It’s a tough sell for anyone in office.”

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

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