Recent trading in U.S. government debt has puzzled exactly seasoned pros. BusinessWeek looks into the Treasury place of traffic’s stratospheric pricing

By David Bogoslaw

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In a season characterized by an ever-growing list of unexampled events—from repeated capital infusions by the founded on government into U.S. pecuniary institutions to historically high mart volatility—it’s tempting to shrug your shoulders when you tend hitherward across truly puzzling valuations that appear to ignore economic fundamentals. Still, the extent to which investor demand for U.S. Treasury bonds has sent prices soaring and yields plummeting seems to contemn intellect.

To get a sense of how a great quantity demand there is as antidote to fully-guaranteed government bonds, uncorrupt look at prices over the past few months. The benchmark 10-year Treasury note was trading at a price of 106-22/32 for a yield of 2.974% on Nov. 26; the excellence was 102-06/32, and the yield 3.73%, on Sept. 2.

Try as you might to set right these moves by citing the in appearance bottomless hunger for cash at American International Group (AIG), to the collapse of Lehman Brothers Holdings, to Citigroup’s (C) precarious position, the activity in the Treasury market sparks a flurry of questions. Inexplicably, investors don’t seem concerned about the low-to-no yields they are getting for their money.

Here are some of the Treasury place of traffic’s greatest puzzles:

Puzzle No. 1: The upward march of Treasury prices

Bill Larkin, portfolio manager for fixed income at Cabot Money Management in Salem, Mass., thinks Treasury bonds are probably one of the in the greatest degree dangerous trades towards investors suitable now. The stock and bond markets are pricing in the worst arrangement in 30 years, through no inflation expectations. "When you get into yields this low, and you receive into this historic expensive zone, adhering the supposition that you plan on holding them to maturity, you’re sharp. But in real terms, adjusted for inflation, you lose," he says.

Larkin says there’s not at all doubt that the liquidity programs being enacted by the U.S. Treasury Dept. and the Federal Reserve will eventually stimulate growth and proceed in rising inflation, contemptuous opposition concerns about how cogent these policies have been thus far in responding to the financial crisis.

Jim Sarni, managing principal at Payden & Rygel—an investment firm in Los Angeles that manages more than $50 billion in assets—calls the flight to attribute into high-priced Treasury bonds a persistent disconnect between emporium fundamentals and market valuations on one hand, and lower classes’s desperation to escape risk on the other. He notes how with child the Treasury has been to abandon certain strategies designed to lover lending and repay confidence in favor of new programs, without fully explaining to the public—or possibly even thinking through—how the proposed measures would actually work.

"As investors, we’re all being bombarded by the agency of information that scratches the superficies [in terms of tiresome] to solve the liquidity problems in the market," Sarni says. "Nothing is gaining traction because none of the details are known, and that’s manifesting itself in people root skittish, which is driving them to the safest thing out there till in that place’s more certainty near to what’session going in continuance."

The latest announcement on Nov. 25 was that the Federal Reserve plans to buy up to $500 billion worth of mortgages bonds guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae, as well as some additional $100 billion of securities from mortgage finance companies such as the Federal Home Loan Bank. That caused interest rates on 30-year mortgages to drop three-quarters of a percentage station within one day, to around 5.5%.

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