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Bond Markets: Sending Mixed Messages?
Wednesday, July 20 2011 | 08:19 AM
NEWOAK CAPITAL LLC
|While US treasuries have rallied and demand for them has risen, bond funds are holding the highest level of cash over the last three years. Congress is debating how to reduce the ballooning US budget deficit by cutting spending and increasing taxes, while the demand for US treasuries has gone up by global investors seeking refuge from the European sovereign debt crisis. On the other hand, mutual funds in the US are setting up for an abrupt price drop in treasury prices and higher yields by increasing their cash positions and giving up yield in the interim.
Despite warnings from the rating agencies of a potential US downgrade if the debt ceiling is not raised in time, US treasuries are still viewed as a safe haven to protect against sovereign defaults in Europe and political uprisings in the Middle East. Regulatory changes in OTC derivatives’ collateral requirements are also adding to the demand for US treasuries. Of course a solution to the Greek debt crisis and a few signs of growth could lead to an abrupt sell off in treasuries, and that is what mutual funds and some of the US institutional money managers are betting on.
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