Judging from recent events, the bond vigilantes are right to suspect that Ben Bernanke is all talk and no action when it comes to keeping long-term rates low. If you recall, I had actually believed the Fed would support bonds because it was concerned about long-term interest rates. This is part of the reason I believed that Treasuries would rise despite being in bubble territory but it looks unlikely.

Given the fact that this site is called Credit Writedowns, you would expect me to take a fairly skeptical view about the growing consensus regarding a rapid recovery in 2009. I do, in large part because I understand that banks face many risks in the coming months due to souring loans and investments which will impair capital through large credit writedowns. The central tenet of this site is that writedowns = reduced capital = reduced credit = reduced growth prospects.

Deutsche Bank has been one of the few banks to have foreseen this problem from the start and they are not signing a V-shaped recovery tune.

The video below is an addendum to my post on Andrew Barry’s Barron’s cover story piece regarding Treasury Bonds and the growing consensus to avoid them. While I agree with the consensus about Treasury bonds being a bubble, I expect the U.S. economy to be weak enough to give Treasuries a shot at another large gain — albeit one which puts them further into bubble territory.

The consensus is coming down on the bearish side for U.S. government bonds in 2009. There is ample reason to believe that Treasuries will be an asset class to avoid this year.

Yet, as I argue in a post a few days ago, “rates can go to unusually low levels for much longer than people think,” as Stephen Roach has said. And with the global economy in a serious state of unwind maybe treasuries are not going to tank. Does this mean, one should be loading up on U.S. Government debt? Not if you believe Andrew Barry of Barron’s Magazine.

With the global economy n recession and inflation headed toward zero, government bonds are looking like the best place to put ones money. As a result, we have seen yields on these assets drop to incredibly low levels in the world’s largest developed economies as their prices have increased.

Treasury securities. They may show all the hallmarks of a bubble. But does that mean that the bubble will end now? Here’s what Stephen Roach says.

I have been arguing for some time that the credit bubble has been replaced by a government bond bubble because much of the liquidity pumped out by the world’s central banks is not going to increased lending. As this money must be invested somewhere, it has gone to the most favoured asset class: government bonds.

With Treasury securities at all time lows you get the feeling fundamentals is not the only thing driving the rally in U.S. government bonds. After all, the Fed has been lowering interest rates and showering the financial sector with money. So, I wanted to highlight a comment that I find fitting.

I recently wrote a post about U.S. Treasury securities which have been rising in price as interest rates have come down. In the post, I called the Treasury rise a bubble and I stick by that moniker despite protests from some astute readers.

However, I do want to point out one reason why Treasurys are rising. Inflation.

The yield on all U.S. Treasurys securities are at historic lows. The 3-year T-bill and the 1-year T-bill have both actually sported negative yields — meaning investors are paying the U.S. Governemnt to borrow money from them. This is the first time this has ever happened and suggests that the zero bound may not be a problem. What gives?

The conventional wisdom in the marketplace is two-fold. First, many believe that investors are fleeing to the safe haven of U.S. treasury bonds and away from risky assets as the financial crisis has created extreme volatility in riskier asset classes. It is also believed that treasury prices are being supported by future deflation expectations. With the price of oil and commodities collapsing and consumer demand weak, inflation has dropped precipitouly in most countries around the world, including the United States.

I have a different view. Treasurys are in a bubble.

The yield on he three-month U.S. treasury bill went below zero for the first time ever. This seems to be an unprecedented move where investors are actually paying the U.S. Government to borrow money. In my estimation, this is not just a flight to a safe haven in turbulent times. Negative interest rates in U.S. treasuries reveal a bubble that will pop and end badly for all concerned.