Treasury Bulls Expect Yield to Peak at 4%

WSJ ^ | 2-8-10 | Mark Gongloff

[smokingfrog]

At the start of the year, the consensus was that long-term U.S. Treasury debt would be the dud investment of 2010. Just weeks later, some investors are beginning to reconsider.

With Greece in turmoil and threatening to spread its woes throughout Europe, Treasurys are again benefiting from their safe-haven status. Treasury debt prices surged this past week, pushing their interest rates, or yields, lower.

Late Friday in New York, the 10-year Treasury note yielded 3.55%, its lowest since Dec. 17.

While the risk of a default by Greece or any other sovereign borrower remains low, the troubles are at least reminders of the fragility of the global economic recovery.

As fear spread, investors bailed out of risky assets like European bonds and the euro and parked their money in the U.S. dollar and U.S. government debt. If the trend continues, that could be welcome news for the U.S. government as it seeks to finance its record deficit.

"Over the next few months, if the sovereign-risk story were to worsen, I believe U.S. Treasurys could actually benefit," said Barclays Capital U.S. fixed-income strategist Amrut Nashikkar. Sovereign-debt worries have coincided with fresh doubts about the strength of the U.S. economic recovery, which have also helped drive Treasury yields lower.

A weaker economy would cool inflation worries, which typically force interest rates higher to compensate investors for the risk.