A Fed report documents the flood of money into U.S. Treasurys since the financial crisis started.
The report, issued by St. Louis Fed economists Bryan J. Noeth and Rajdeep Sengupta, notes the “anomalous behavior in the market for Treasuries” since the financial crisis struck three years ago.
The government has sharply increased the pace and size of debt sales, to cover a growing spending tab in a deep recession. This surge in supply has been widely viewed as an unambiguous signal for prices to fall.
But the price of Treasury securities has instead risen, as investors desert riskier investments in favor of the deep and liquid market for Treasurys, and for bonds’ relatively sure income streams.
The yield on the 10-year Treasury note recently dropped to 2.9%, and was at 2.93% Thursday. Those are the lowest readings since November 2008, just before government bond prices soared amid the collapse of the financial sector, sending yields to levels not seen in decades.
Noeth and Sengupta say the those events support the view that U.S. government bonds remain a haven for investors at times of stress. They do wonder, however, why that’s so given the crisis originated here, with America’s demand for foreign capital and the excesses of Wall Street.
“Interestingly, it seems that although the U.S. was at the epicenter of the financial crisis, both foreign and domestic investors still sought the safety of U.S. government debt instruments,” they write.
They also wonder how long this can go on – a question that is proving popular among legislators this week with Fed chief Ben Bernanke (right) testifying on Capitol Hill. Like so many others, Bernanke has said he views the U.S. financial position as unsustainable without expressing any view as to how the end might come.
“These data present evidence in support of the hypothesis that investors see U.S. Treasuries as relatively risk-free,” the economists write. “However, it will be interesting to see how investors view U.S. securities in the future as debt levels continue to rise.”