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The Bear Case
| February 13, 2012 | 10:55 AM EST

The improving performance of Treasury Inflation-Protected Securities, TIPS, is a further warning signfor bondholders. “Within the bond market, inflation expectations are coming back,’’ says Michael Gayed, chief investment strategist at New York’s Pension Partners, pointing to the fact that junk bonds and TIPS are now beating Treasurys. “Even on risk-off days, TIPS are still outperforming.”

The threat of inflation and higher interest rates isn’t the only headwind facing the Treasury market, Colyer points out.

The Fed has been the largest buyer of U.S. government debt, propping up prices and pushing down yields . When the buying spree ends, prices and yields could see a sharp correction, even on the shorter end.

“Broadly speaking, Treasurys are overvalued throughout the [yield] curve,’’ adds Chris Molumphy, chief investment officer of Franklin Templeton Fixed Income Group.

Resolution of Europe’s debt crisis and reduced volatility could also cause U.S. Treasurys to lose their safe haven status .

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