Saturday, June 19, 2010

Too Much Complacency on Treasuries?

Barron's may be ringing a bell of sorts with Randall Forsyth's piece titled Fed to Touch Extension Chord:

FED WATCHERS MAY as well take next Wednesday off. Even though the Federal Open Market Committee will wrap up its two-day policy meeting that day, they aren't likely to have much new to scrutinize. So, they can take in a round of golf or a matinee and not be missed. . .

As result, the forecast for interest rates has moved to lower, longer. For instance, the Royal Bank of Scotland made a large, downward revision in its outlook for U.S. rates -- even with continuing economic recovery. . .

In the current investment environment, there are lots of things to worry about. Higher U.S. inflation and Treasury yields aren't among them.

Mr. Forsyth is wrong. Worry away.

Zero maturity and one-year Treasury yields are below current inflation as measured by the CPI, and coincident indicators continue to rise. The war effort in Pak-ghanistan is inflationary, and the drilling moratorium imposed by the administration can only push oil prices higher.

Higher Treasury yields are justified both by the continued abuse of savers at the expense of borrowers and bankers on the short end, and almost insane projections for continuing massive deficits with resulting exponential growth of interest expense making the long end unattractive as well.

Fears of double dip recession or some further noise out of Europe that would push prices of Treasuries yet higher would offer attractive exit points. The second half of this year smells like a great time for this to occur.

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