As the credit and stock markets collapsed, investors rushed to Treasuries as the safest possible bet. But the rush to safety could be fueling a bubble, writes Andrew Bary for Barrons. Yields have been plummeting, with 10-year notes at 2.4% and three-month bills selling last week for 0.05%. The bonds will still pay out at maturity, but prices could fall steeply by year’s end.
The Fed’s super-low interest rates and looming fiscal stimulus, and the possible recovery of the economy by mid-2009 all make a reckoning in Treasuries likely. Bary recommends playing the other aspects of the bond market instead. AAA 30-year municipal bonds now offer 5.25%—double the yield of 30-year T-bonds—while the average junk bond, while risky as ever, offers a 20% yield.