The U.S. bond market is headed for a crash and U.S. Treasurys are junk....analysts have been telling us through most of the year.
These comments have been prompted by the Federal Reserve's ultra loose monetary policy or bond purchases via its quantitative easing program that have kept interest rates at rock bottom to kick-start the U.S. economy.
Global economic uncertainty, heightened by the euro debt crisis, has seen investors fleeing to the safety of U.S. Treasurys and pushed yields to record lows as prices race higher. Bond issuances hit a record high this year - surpassing the $1 trillion mark in October and inching closer to an all-time record set in 2007, just before the global financial crisis.
This build-up has led to worries about an impending bust. The fear is that as inflation begins to creep up again, the Fed will be forced to abandon its ultra-loose policy, which could trigger a sell-off, pushing yields sharply higher and making it harder for the U.S. government to pay back investors.
Billionaire Wilbur H. Ross told CNBC in March to get ready for a bust in 10-year bond prices and longer-dated Treasurys, because the idea that inflation is gone and artificially low rates can last is "silly." Despite these doomsday predictions, investors continue to rush into Treasurys. The yield, which moves in the opposite direction to price on the benchmark 10-year note has declined from over 2 percent to 1.6 percent in the past 12 months - well below its average of 4.4 percent of the past 10 years, according to Reuters data.
The outlook for inflation in the U.S. remains benign, and growth is also expected to remain lackluster next year, suggesting U.S. monetary policy will remain loose for some time.