Buying Treasuries 'a greater-fool thing,' says Barclays

Steer clear of sovering debt, bank says; corporate debt a better bet

Sep 20, 2011 @ 3:46 pm

Investors who are pouring money into Treasuries instead of higher-yielding assets amid signs the U.S. may enter a recession and as interest rates hover at about record lows are making a mistake, according to Barclays Wealth.

Investors face negative real yields, said Hans Olsen, head of investment strategy for the Americas at Barclays Wealth. He said with inflation as measured by the consumer price index running at an annual rate of 3.8 percent, they have a better shot at maintaining purchasing power with corporate debt and dividend-paying stocks instead of government bonds.

“The people that are buying our Treasuries right now, they're focusing on, ‘Well, I can get 0.9 percent on a five-year piece of paper, that's good enough for the environment we're in,' they're not thinking about the purchasing power of it,” Olsen said today at a press briefing in New York. “The funny thing is that when prices are really, really cheap sometimes, that's where the least amount of risk is, and when prices are extraordinarily expensive, that's where all the risk is.”

U.S. Treasuries due in 10 years or more have rallied almost 20 percent this quarter, poised for the best three-month period since 1986, as economists slash growth forecasts for the world's biggest economy and as Europe's debt crisis worsens. Many economists expect the Federal Reserve to announce some version of what traders call “Operation Twist” this week, according to a Bloomberg News survey, the latest step by the central bank in its four-year effort to keep the economy out of a recession.

Crossover Names

“I don't think it's going to do anything,” Olsen said of the move. “It's pushing on a string. I can give you the money, I can make it cheaper, but I can't actually make demand for it.”

Olsen said his firm, which oversees $272 billion of assets, is seeing opportunities in speculative-grade debt, lower-rated investment-grade bonds and so-called crossover names.

“Either the lower end of investment-grade or the high end of high-yield, especially double B, is just really cheap,” he said.

Par-weighted prices on bonds graded BB have fallen to 101.4 cents on the dollar from as high as 106.9 cents in May, according to Bank of America Merrill Lynch index data. All debt rated below Baa3 by Moody's Investors Service and lower than BBB- by Standard & Poor's has lost 3.2 percent this quarter, while Treasuries maturing in 10 years or more have gained 19.8 percent, the index data show.

‘Greater Fool'

The rush to sovereign debt represents a “bubble,” Olsen said.

“It seems like the flows into the sector are so massive that there is this belief that perhaps somebody else will buy it from them at a greater price, right, so there's a greater fool thing going on here -- maybe it gets worse, and I can sell it to someone else at a higher price,” he said. “A wise man does first what the fool does last, so we want to be talking to folks about being the first rather than the last.”

Seventy-one percent of the 42 economists surveyed by Bloomberg said the Federal Open Market Committee will decide to replace short-maturity Treasuries in its portfolio with longer- term bonds in “Operation Twist,” known as such for its goal of bending the yield curve.

Equities are “very cheap, and you get paid to wait,” Olsen said. “Corporate debt, cheap. You can even do munis. You're not going to make a lot of money on munis but at least you maintain the purchasing power on your capital. What's really expensive, the thing that everybody loves, is sovereign credit, especially U.S. sovereign.”

--Bloomberg News--


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