Financial Repression Spreads Across Income Markets

By: The Financial Lexicon

(May 2012) Financial repression is alive and well in the Treasury market, and it feeds through to corporate bonds as well. Despite trading at a spread to Treasuries (TLT), corporate bond yields have been dragged down with Treasuries, creating an environment in which even in the corporate bond market, investors might feel compelled to move into longer dated securities in search of yield. One other option would be to move down the credit quality scale into high-yield debt (HYG).

I often hear financial pundits ask why anyone would buy Treasuries at these levels. It’s important to keep in mind that the Fed has been a very large buyer in that market, and it doesn’t seem to care about price. Also, new capital buffer requirements effectively force certain institutions to buy larger amounts of Treasuries than they otherwise would (some are already preparing for the higher buffers). And, every so often, we get the seemingly never-ending “flight to collateral” (as opposed to the often cited “flight to safety”) bid Treasuries receive when some new economic worry sends “risk” assets lower.

Between the Fed’s buying, new capital buffers for banks, and the “flight to collateral,” there will be big buyers in the market for some time to come. Furthermore, the extreme negative sentiment among money managers and the low household ownership of Treasuries indicate that selling pressure from those two segments of the investing community is not something likely to overwhelm the market in the foreseeable future.

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