No Change in Treasury Markets

Posted: Jan 12, 2012 12:01 AM

When my career in the financial industry first started, I asked my grandfather, a fifty-seven year veteran of Wall Street, why it was so difficult to acquire clients.  He told me the reason was that most people don’t like change. 

He also added that irrespective of the financial performance or the ability of the financial advisor, there is a certain comfort level that sets in. 

I said “I don’t get it, why is making a change such a big deal?”  He responded, “You’ll understand as you get older.” 

If you think about my grandfather’s response and the comforting feeling that history and tradition gives to people, it’s not such a far stretch to understand why the treasury market is performing the way it is, which in my opinion, will continue. 

Most recently, the Treasury Department sold $21 billion worth of 10-year notes at an astonishing yield of 1.9%. 

The auction didn’t just squeak by, there were triple the number of bidders for every one note. 

Think about it. 

This was the lowest interest rate in history for a 10-year United States Treasury, yet it was dramatically oversubscribed. 

If one listens to the inflationistas of the world, of which there are many and you know who they are, you would never buy a treasury since at some point there will be a so-called dramatic reversal. 

However, that means you would have never participated in the best investment for 2011, and missed the opportunity to book terrific returns. 

The argument of inflation vs. deflation will continue, and bets will be made and positions taken accordingly. 

Nevertheless, if we simply view the acquisition of treasuries as the meeting and greeting of an old friend, the purchase of treasuries doesn’t sound so strange. 

Irrespective of what camp (inflation vs. deflation) you’re in, think about the comparison in political terms. 

For example, picture the U.S. compared to Greece, Italy, France, or even Germany.  Which country gives you a more comfortable feeling?  Or, how many Molotov cocktails have been thrown recently in Boston? 

You get the idea. 

None of these foreign countries has a printing press to print money (bailout). 

Yet, we do. 

Finally, the tradition of not defaulting on any interest or principle payment goes a long way toward the old adage that sometimes it is better to achieve a return of capital than a return on capital. 

For all these reasons and many more, the comfort level of treasuries will continue and the habit of seeking them out in times of trouble will remain.  I truly appreciate what my grandfather meant. 

Change is hard to come by
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