The treasury bond market in the U. S. has been one of the few beneficiaries of the recent turmoil in global markets. When investors become worried about the stock market, one of the places they turn to for safety is the U.S. treasury market. This so-called "flight to safety" has been going on for about a week now, and we think it has run its course. We anticipate a gradual move away from bonds, and back into stocks and other more "risky" assets as time goes by.
That's the prognosis for the short term. On a longer term basis, as long as the U.S. continues to run an increasing trade deficit with the rest of the world, and continues to pursue a policy of fiscal stimulus, our treasury bond market is at risk. This is because at some point, the countries that finance this deficit by buying our treasuries, will begin to demand higher compensation for taking the risk of having so much of their wealth invested in one asset. Our deficits will continue to grow for the forseeable future, and regardless of how you value the dollar, those deficits need to be financed with foreign investments. Our strengthening dollar is now making our bond markets outperform the rest of the world, but the risk to foreign governments of owning too many dollars is still high. This is why we are bearish on treasury bonds.
