Current state of the Bond Market

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interesting article that I read from the front cover article of Barron’s this weekend covering how the current bond market is doing.  Comparing the beginning of the year to the end of Q1, bond markets are starting to show depressed signs of appetite for treasuries.  What I first thought as an increased appetite to a flight of risk is actually an increased appetite to a flight to quality.  Markets simply want better returns for a similar amount of safety else where such as the Altria group 9.7s bonds yielding 7.57% compared to 8.05% in the beginning of the year. 

We would have to find out what will play out next for the next 2 weeks as investors are becoming jittery again regarding the current state of the economy. 

A couple of notes to mention regarding the FED’s current buy program for US treasuries:

• Trying to soak up the bond overwhelming treasury offerings with a program to buy $300 billion of government debt through September.
• Has already purchased $100 billion of it.
• FED also has a program to buy $1.25 trillion of agency mortgage securities as part of an effort to depress mortgage rates, averaging around 5%.

For the time being the FED has succeeded in artificially depressing treasury rates, but once the FED buy program ends, it will remove a key piece of support for treasuries.  Eventually the FED is going to get stuck with huge losses as it expands its balance sheet even more.  Now currently standing at $1 trillion, it could double by the end of the year. 

“If treasury rates rise by 1%, the FED could suffer $140 billion in losses.” – Sean kelleher (JGC MGMT)

Source: Barron's