Why do people keep buying Treasurys?

Investor money continues to flow into government bonds even amid increasingly optimistic views for the economy.

By MSN Money Partner Jun 11, 2014 12:36PM
Image: Woman reading newspaper in livingroom © Tetra images/Getty ImagesBy Jeff Cox, CNBC

There's just no making sense of the government bond market.

At a time when strategists are treating Treasurys like a patch of poison ivy growing in the blooming stock market garden, investor money continues to rain in.

"When you think you have things figured out and you play your hand, something seems" to change, Kim Rupert, managing director of global fixed income analysis for Action Economics, said in an interview. "What seems to hurt the most people the most amount seems to come back into play."

In the broad view, bond bears would seem to have logic on their side.

After a decades-long bull market, fixed income seemed to be ready for retreat. Unprecedented intervention from the Federal Reserve to keep interest rates low are coming to a close, with the central bank unwinding its monthly bond-buying program and likely to start increasing short-term rates in another year or so.

At the same time, economic consensus holds a generally bright view for the economy, which itself is supposed to push rates higher, and inflation has been on a gradual increase as well.

Yet the market doesn't seem to be listening.

The 10-year yield is up about 0.11 percentage points in June but remains at just 2.63 percent, well below the 3 percent starting point in 2014. As for fund flows, bonds in general have seen a positive year, and Treasurys have done particularly well.

The iShares 20+ Year Treasury Bond exchange-traded fund has seen inflows of $1.84 billion this year, according to ETF.com, and has gained about 9 percent—far better than the  Standard & Poor's 500 Index's ($INX) rise of 5.4 percent. As for the shorter end of the curve, the iShares 7-10 Year Treasury Bond ($IEF) has reeled in close to $6 billion for the year -- the most of any ETF -- though it has gained just 3.2 percent so far. The ProShares Ultra 7-10 Year Treasury (UST) has taken in a respectable $1.88 billion as well.

At the bottom of the bond market's mystery appears to be some extenuating factors that may not last.

For one, European Central Bank President Mario Draghi's announcement last week that the institution will do its own version of quantitative easing and introduce negative interest rates for bank reserves has put a lid on rates at least for now.

Also, investors who built massive short positions on Treasurys -- and continue to do so -- have had to cover their losses, which in turn has triggered the aforementioned fund flows.

In the long run, though, going long Treasurys still looks like a risky bet.

Tuesday's three-year auction saw mediocre demand and yield that was a bit higher than the market anticipated, perhaps an indication that thirst for government debt is starting to wane.

"While the Fed will do their best to wait as long as possible in raising rates, the recently upward-moving inflation figures along with the unemployment rate, which has been dropping by an average of about one-tenth per month over the past few years, will put major pressure on their hoped-for exit timeline," Peter Boockvar, chief market analyst at The Lindsey Group, said in a note.

The result has been an outpouring of bearish sentiment for government bonds, despite the positive performance this year. Morgan Stanley, for one, proclaimed Monday that it is "maximum underweight" in its allocation to Treasurys.

Translation for investors: Tread carefully when deciding whether to join the first-half 2014 run into government debt.

"I would hate to (buy) at these prices, but then you look at Spain with a 10-year trading through the Treasury," Rupert said. "There's so much money out there. It has to go somewhere."

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Tags: $INX
Jun 11, 2014 1:02PM
It's not really "investors" that keep buying Treasuries, it's the Federal Reserve, and they're doing it in a round-about, sleazy kinda way, so dumb sheep can claim they aren't technically monetizing the gov debt.
Jun 11, 2014 1:01PM
I do not buy treasury bonds. Why would I want to help the government go deeper into debt?
Jun 11, 2014 1:20PM
Trade your bonds for something else it works for obama!
Jun 11, 2014 3:36PM
I went to a financial seminar last week and was told about the impending bond bubble. It is huge and when rates start to move up everyone holding bonds will run for the exits and poof there goes your money. If rates go up to 3.5 % you wont be able to give away 2.63 % bond.
Jun 11, 2014 2:14PM

"At the same time, economic consensus holds a generally bright view for the economy."


Maybe on the market shill planet where YOU live but on this planet, not so much.

Jun 11, 2014 2:28PM

With the call for "War" ringing in the halls of Russia

The Crisis in Crimea and the Black Sea Ports

A build-up of interest in the Arctic Ocean 

and NATO Forces forming an alliance to hold off

Russian troops

War Games taking place in Greenland , Denmark

with our allies ..

Wall Street never looked better.. or does it..

Jun 11, 2014 4:28PM
Just set the printer on 130 billion Obama Dollars and the May deficit will be gone in a snap!
Jun 11, 2014 4:30PM
land is best investmend.bonds can be printed.but land cannot be printed.you have to buy farmland or land in good place not a ghetto
Jun 11, 2014 5:02PM

Time to short treasury bonds.  With the rates at near record lows, there is really only one direction that they can go.  It may take a couple years, but what do you think is gonna happen when people start hitting the exits?  Rates will rocket up fast and your shorts will be sitting pretty.  Be patient and just ride the waves.

Jun 11, 2014 6:20PM
US Treasuries have a negative real interest rate. Nobody that doesn't have to buy them - like certain pension and other bond funds, foreign governments that need a more stable cash reserve than their home currency, or the US Government itself - is buying them. If you're buying them you need your head examined.
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