Raw Finance

With the impressive stock market rally off the March lows continuing, U.S. Treasuries have virtually fallen off the investing radar.  However, while some investors (traders, to be more accurate) seem hungry for risk and believe (once again) that there is no upside limit to stock prices, investors saving for retirement should take a look at Treasuries.  The economic recovery is likely to disappoint the equity markets, and so, the gains of the past few months may be lost as time passes.  Treasuries provide a safe haven from risk and offer a return (albeit rather small) on one’s investment.

At this point, this author would advise investors to simply watch the Treasury markets for any further price weakness.  As prices drop, interest rates increase.  So, by waiting, one may not only get in at a lower price, but also at a higher return.  The U.S. government, in order to finance its growing debt issues Treasuries through auctions, and more are on the way.  With supply increasing, prices are likely to decline further.  According to the Wall Street Journal (subscription required), the market for Treasuries recently took up a record $200 billion in new debt during the course of a few days and is anticipating news on upcoming debt auctions. Today, the Treasury is set to explain its borrowing needs, while it will announce Wednesday next week’s auctions of notes and bonds [UPDATE 8/4/2009—The Treasury, which issued a record amount of debt in the past year to fund the surging federal budget deficit, said it will borrow less in the third quarter than it had previously expected, in part because banks repaid billions of dollars of government aid under the Troubled Asset Relief Program. The Treasury said it plans to borrow an estimated $406 billion in the quarter, $109 billion less than it had estimated. It expects to end September with a cash balance of $270 billion.The government also borrowed less in the second quarter than expected, issuing $343 billion in debt, compared with earlier estimates of $361 billion].

The announcements are “going to set the tone for any new debt, to show how they are going to deal with the massive amount they still have to sell,” said FTN Financial strategist Jim Vogel.

In addition, Bloomberg reports that, according to MKM Partners, bank holdings of Treasuries have increased 5.6 percent during the past year, helping to keep borrowing costs from jumping. Analysts expect purchases to accelerate as banks seek out places to keep increasing deposits. “We expect demand to shift to Treasuries, given low net supply in corporates,” said Srini Ramaswamy, a fixed-income strategist at JPMorgan Chase. The company’s models “suggest that bank purchases of corporates and mortgage-backed securities will be small relative to the growth in deposits net of loans, which have been growing at a rate of roughly $29 billion per month.”

Once we hear from the Treasury about its borrowing needs, i.e. the future supply of Treasuries, then we can make some informed decisions.  Knowing that there is likely to be demand for Treasuries from banks, it would be wise to get into the Treasury market before banks’ purchasing increases and drives up prices, which will lower the yield.  Timing as always is critical, but having the right information, and analyzing it correctly helps reduce timing risk.