The worst first half for Treasuries in four years has wrung the unprecedented Federal Reserve stimulus out of bond prices as investors now look to low inflation and slow economic growth to contain yields.
The big winner in the battle over the U.S. government budget may be the bond market, as investors say for the first time since the onset of the financial crisis they see lawmaker resolve to trim the $1 trillion deficit.
Five years after Federal Reserve Chairman Ben S. Bernanke dropped U.S. interest rates toward zero to end the worst economic crisis since the Great Depression, America’s financial markets have become the envy of the world.
U.S. government bonds are acting more like equities than any time since before the credit crisis, making Treasuries a hidden risk to investors becalmed by the prospect of the Federal Reserve prolonging stimulus into 2014.
While Treasury 10-year note yields approach record lows, they’re cheap compared with AAA debt of other nations, helping trigger record demand at U.S. bond auctions even in a fourth year of $1 trillion budget deficits.
Foreign bank deposits at the Federal Reserve have more than doubled to $715 billion from $350 billion since the end of 2010 amid Europe’s debt turmoil, buttressing the dollar’s status as the world’s reserve currency.
The highest inflation-adjusted yields in the world’s most-developed bond markets are appeasing investors waiting for President Barack Obama to begin reducing the more than $1.2 trillion U.S. budget deficit.