Treasury Demand Brings Yields To Record Lows
Although the U.S. will be adding a significant amount to the national debt this year, the one good thing is that short term borrowing costs are at an all-time low for the government. With the economy in turmoil, investors are flocking to the safety of Treasury Securities in unprecedented droves.
For the first time ever Treasury yields fell to 0.0% and no that isn’t a typo. Investors right now, are more worried about keeping their principal intact as opposed to seeking positive returns.
The stock market has been a big loser this year for many investors and while many stocks seem to be bargains, the reality is that a rally doesn’t seem forthcoming anytime soon. With the global economy entering what many expect to be a long drawn out recession, the steep yield curve could persist for some time.
Even with the government’s record deficit this year, demand is far outstripping supply for one and three month Treasury Bills. The low borrowing costs could be significant as the government will likely have another large deficit next year as well.
One of the first acts of the new administration will likely be the passage of an economic stimulus package valued somewhere between $500 billion and $1 trillion mark. It also remains to be seen if the second half of the $700 financial rescue package will be sufficient to stabilize the banking system.
The key thing to look for is whether there will be spillover investment towards mortgage securities sold by the now government run Fannie Mae and Freddie Mac. With the government officially backing their debt now, some investors may consider them as safe as Treasuries but with a higher yield.
Increased demand for these mortgage securities could help drive down mortgage rates, which could play a significant role in an attempt to jump start the housing market. At this point it is difficult to see the rest of the economy improving until the precursor to our current problems is solved.
