Kessler: Record-Low Treasury Yields Will Keep Falling

Sunday, 03 Jun 2012 12:40 PM

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The yield on the 10-year Treasury note has fallen to record lows, briefly dipping below 1.5 percent on fears the global economy is headed for another downturn, but investors should buy now, as yields will keep falling, noted bond investor Robert Kessler, head of the Kessler Companies, tells Barron's.

The yield — which moves inversely to a bond's price and serves as a good indicator for an investor's sense of risk — has fallen amid an intensifying European debt crisis, which has sent investors worldwide racing to U.S. government debt in a safe-haven play.

Despite rock-bottom interest rates, the U.S. Treasury is seen as a good place to stash money until blue skies return.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

Dismal jobs reports in the U.S. have fueled demand for Treasury bonds and notes and repelled appetite for stocks, which do better amid economic expansion.

Many world-class bond investors have erred on U.S. government debt in the past few years, saying investors should get out in view of hefty U.S. debt burdens.

Government debts often send investors demanding more yield.

But with interest rates near zero and, more importantly, with inflation still at bay, the yield on the 10-year Treasury and even the 30-year instrument have room to rise.

"Simply put, Kessler says Treasury yields are the product of the Federal Reserve's policy stance — which has been to peg the overnight federal-funds rate at virtually zero — and inflation, which is nowhere in sight," Barron's reports.

"Based on historical norms, the 10-year Treasury note would trade at 75-100 basis points (0.75 to one percentage point) above the fed-funds rate target. So a 1.20 percent 10-year T-note would be in line with past cycles. So, too, would a 30-year bond yielding 1.50 percent—1.60 percent, well below 2.66 percent currently."

Despite weak returns, the U.S. Treasury is deemed safe and liquid.

"Bond King Kessler contends that, as long as the Fed is pegging the funds rate at zero, deflation trumps inflation and deleveraging remains the dominant theme, interest rates will fall still further. So far, those who have ignored or have actively opposed his message are poorer for it," Barron's adds.

Stocks, meanwhile, are suffering due to a slew of weak economic indicators, including a first-quarter gross domestic product rate of 1.9 percent, revised down from a initial 2.2 percent estimate, and a May jobs report that shows the economy picked up a scant 69,000 jobs
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"The markets have become less optimistic and much more accustomed to seeing numbers that are just not impressive," says Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey, according to Reuters.

"It is clear the markets are pricing in a substantial slowdown moving forward in terms of GDP growth, employment gains, productivity gains — it's not encouraging for bulls."

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

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