What's behind the long secular bull market in U.S. Treasuries?
I believe that it's largely irrational, fueled largely by foreign investors that are afraid to invest anywhere else. There are a few people out there right now who are writing about this: http://www.marketwatch.com/story/us-treasuries-largest-bubble-in-world-history-says-nia-2011-08-30 http://articles.businessinsider.com/2010-08-25/markets/30080511_1_fed-first-yields-mbs As to why would you invest in long-dated versus short? Probably to chase yield. The 30 year yields 30x more than the 1 year. It's also easier to buy on the long end if you believe that the economy will remain slow for another decade or two and therefore the central banks will keep rates low for a very long time. Of course, at the moment, long-dated treasury prices are artificially high because of operation twist. In a secular bull market, strong investor sentiment drives prices higher, as participants, over time, are net buyers. Secular markets are typically driven by large-scale national and   worldwide events... demographic/ population shifts,   governmental policies... bear market periods occur within   the longer interval, but do not reverse the trend. There are still many reasons to buy the long bond, despite the lack of yield (nearly flat term structure of interest rates). Despite the recent credit ratings agency downgrades of U.S. sovereign risk, the T-bond offers greater relative security than many alternatives.  If Germany were NOT part of the EU, its government bonds would be issued by the Bundesbank, denominated in Deutsche Marks. German government bonds would probably be a better choice than the U.S. Treasury's 30-year bond.  Long-term maturity U.S. Treasuries are in demand by investment and portfolio managers because:
"I'll tackle number 2. It's one which many academics dismissed as an impossibility; after all, how could that be rational? What could cause negative yields (ie effectively giving an entity cash and paying for the privilege of doing so!) is something we've experiencing currently: fear. Back in the financial crisis, investors were actually paying to store their cash in treasuries, because of the  fear that if they left it with a bank they might not get it back.   What about the FDIC Insurance you may ask quite logically. The problem is that we're talking about massive entities, like pension funds, asset managers, corporations, who normally would store some (think millions - billions) in cash and cash equivalents (bank accounts, money market funds, short-term paper), they really aren't protected. So, they do what turns out to be the rational thing, which is pay a premium on ""safe assets"" ie US Gov't bills to guarantee you get most of your money back.  The same thing is currently happening with German front-end paper, as Europeans pull their money out of banks/periphery assets and search for safety.  Hope that helped." Yes, the Fed has made a point of buying up longer-term bonds to push down rates on that part of the curve.  That's not an indication that they're having problems selling Treasuries, in fact far from it.  But apparently there's no demand for Treasuries and Bloomberg is just making up lies to help get Obama reelected?  &gt;Investors are plowing into Treasuries (USB2YBC) at a record pace as the supply of the world’s safest securities dwindles, ensuring yields will stay low regardless of whether the Federal Reserve  undertakes more stimulus to fight unemployment. Buyers bid $3.19 for each dollar of the $538 billion in notes and bonds sold this year, the most since the government began releasing the data in 1992 and on pace to beat the high of $3.04 in 2011. The net amount of Treasuries available will decline by 30 percent once proceeds from maturing securities are reinvested, according to data from CRT Capital Group LLC.  http://www.bloomberg.com/news/2012-04-09/record-treasury-demand-keeps-yields-low-as-supply-shrinks.html But a textbook liquidity trap means prices fluctuate.  We've seen nothing but steady increases in every single possible measurable standard.  Liquidity traps occur when there is fear of deflation.  There is no such fear.  Deflation would be a welcome remedy to today's currency crisis.  Your paycheck would be able to purchase more and we would see prices fall, making it easier for the average American to afford their food, gas and housing.  Plus, lending is down not because banks are hoarding cash.  If anything, banks are trying to lend out more than ever.  Standards for borrowing have plummited.  Anyone willing to sign a contract can get hundreds of thousands of dollars at the drop of a hat.  Lending is down because consumer and business demand for more debt is down.  I stopped reading Krugman years ago, but if he is seriously trying to sell a liquidity trap right now, he is horribly misleading people and his advocacy of the Fed's printing and lending policies as of late is just flat out dangerous to the global economy. "A brief review of the financial collapses in the last 30 years will show that the following events take place in a fairly typical cycle: Overuse of that innovation (resulting in inadequate supply to meet demand, in most cases) Inadequate capacity in regulatory oversight for the new volume of demand, resulting in significant unregulated activity, and non-observance of regulations to a greater extent than normal Confusion regarding shifting standards and regulations, leading to inadequate regulatory reviews and/or lenient sanctions for infractions, in turn resulting in a more aggressive industry ""Gaming"" of investment vehicles, markets and/or buyers to generate additional demand once the market is saturated ""Chickens coming home to roost"" - A breakdown in financial stability, operational accuracy, or legality of the actions of one or more significant players in the market, leading to one or more investigations A reduction in demand due to the tarnished reputation of the instrument and/or market players, leading to an anticipation of a glut of excess product in the market ""Cold feet"" - Existing customers seeking to dump assets, and refusing to buy additional product in the pipeline, resulting in a glut of excess product ""Wasteland"" - Illiquid markets of product at collapsed prices, cratering of associated portfolio values, retirees living below subsistence incomes Such investment bubbles are not limited to the last 30 years, of course; there was a bubble in silver prices (a 700% increase through one year, 1979) when the Hunt brothers attempted to corner the market, followed by a collapse on Silver Thursday in 1980.   The ""poster child"" of investment bubbles is the Tulip Mania that gripped the Netherlands in the early 1600's, in which a single tulip bulb was reported to command a price 16 times the annual salary of a skilled worker. The same cycle of events took place in each of these bubbles as well. Templeton's caution is intended to alert new (especially younger) players in the market that these patterns are doomed to repeat, and that market cycles cannot be prevented or eradicated; they are an intrinsic effect of the cycles of supply and demand that are not in synch, and in which one or both are being influenced by intermediaries. Such influences have beneficial effects on short-term profits for the players, but adverse effects on the long-term viability of the market's profitability for investors who are ill-equipped to shed the investments before the trouble starts." Supply and demand for a particular bond may be such that the market price exceeds the par value for the bond at maturity. This is when you get a negative yield. Especially when volatility is high, people will actually pay money to park it in treasuries for an amount of time. But when compared to a > 25% vol in the equities market over that same period, taking a 5% or less hit doesn't sound nearly as bad! "&gt;If mounting debt is such an issue, why do all the markets act as though the US is perfectly solvent?   They don't. China, Russia and most emerging markets are selling U.S. treasuries faster and faster. They have started doing so a couple years ago and are doing so at a higher pace now. They sold record numbers of U.S. treasuries in June. Many countries are forging trade partnerships with each other to get away from U.S. debt and even the U.N. and IMF are calling for an end to the dollar as the global reserve currency because it no longer deserves that status, largely due to increasing debt. By the way, the Fed is owning a larger and larger portion of U.S. debt these days.  &gt;Why is our interest rate so low, and why do investors around the world continue buying Treasury bonds?   The federal reserve keeps rates low. Investors speculate about the future of the market all the time, but they are starting to dump them now http://www.bloomberg.com/news/2014-08-15/u-s-investment-outflow-reaches-record-as-china-sells-treasuries.html http://www.reuters.com/article/2014/08/15/usa-economy-capital-idUSL2N0QL0T520140815  http://www.ft.com/intl/cms/s/0/eaccbe18-aea6-11e3-aaa6-00144feab7de.html  &gt;The total net outflow of long-term U.S. securities and short-term funds such as bank transfers was $153.5 billion, after an inflow of $33.1 billion the previous month, the Treasury Department said in a report today. The June figure, and $40.8 billion in net selling of Treasury bonds and notes by private investors in June, **were the largest on record, the Treasury said.**  &gt;""This is a disappointment and is a negative for the dollar. Clearly, the United States is having a hard time attracting investments to offset its current account deficit,"" said Michael Woolfolk, global market strategist at BNY Mellon in New York.  &gt;Central banks sold US Treasury debt at the start of the year, according to the latest official data released on Tuesday, as stress among emerging market countries intensified. Declines in Treasury holdings were seen for Thailand, Turkey and the Philippines, which sold $3.9bn, $3.3bn and $1.5bn respectively during January.   Wow look at that. Did you just dismiss all evidence that proves you wrong? I think so!" Long convexity is achieved by owning long dated low delta options. When a significant move occurs in the underlying the volatility curve will move higher. Instead of a linear relationship between your long position and it's return, you receive a multiple of the linear return. For example: Share price $50 Long 1 (equals 100 shares) contract of a 2 year 100 call Assume this is a 5 delta option If the stock price rises to $70 the delta of the option will rise because it is now closer to the strike. Lets assume it is now a 20 delta option. Then  Expected return on a $20 price move higher, 100 shares($20)(.20-.05)=$300 However what happens is the entire volatility surface rises and causes the 20 delta option to be 30 delta option. Then The return on a $20 price move higher, 100 shares($20)(.30-.05)=$500 This $200 extra gain is due to convexity and explains why option traders are willing to pay above the theoretical price for these options. Robert Shiller has an on-line page with links to download some historical data that may be what you want here. Center for the Research in Security Prices would be my suggestion for another resource here. To my knowledge, the only bond ever issued by a notable state into perpetuity was the Bank of England...and it was a miserable mess for all the obvious reasons.  Edit : They were called consuls, and it appears i was wrong about them being catastriphic for the BOE. I'm sorry, i guess i must be cruising the permabear backwoods or something. Here's some interesting links i found.  http://en.wikipedia.org/wiki/Consols  http://www.immediateannuities.com/annuitymuseum/annuitycertificatesofthebankofengland/consolidatedannuities/  http://www.economist.com/blogs/buttonwood/2012/03/debt-crisis-0?fsrc=scn/fb/wl/bl/hundredyearsofsolvency "This is a speculative question and there's no ""correct"" answer, but there are definitely some highly likely outcomes. Let's assume that the United States defaults on it's debt. It can be guaranteed that it will lose its AAA rating. Although we don't know what it will drop to, we know it WILL be AA or lower.  A triple-A rating implies that the issuer will never default, so it can offer lower rates since there is a guarantee of safety there.People will demand a higher yield for the lower perceived security, so treasury yield will go up.  The US dollar, or at least forex rates, will almost certainly fall. Since US treasuries will no longer be a safe haven, the dollar will no longer be the safe currency it once was, and so the dollar will fall. The US stock market (and international markets) will also have a strong fall because so many institutions, financial or otherwise, invest in treasuries so when treasuries tumble and the US loses triple-A, investments will be hurt and the tendency is for investors to overreact so it is almost guaranteed that the market will drop sharply. Financial stocks and companies that invest in treasuries will be hurt the most. A notable exception is nations themselves. For example, China holds over $1 trillion in treasuries and a US default will hurt their value, but the Yuan will also appreciate with respect to the dollar. Thus, other nations will benefit and be hurt from a US default. Now many people expect a double-dip recession - worse than the 08/09 crisis - if the US defaults. I count myself a member of this crowd. Nonetheless, we cannot say with certainty whether or not there will be another recession or even a depression - we can only say that a recession is a strong possibility. So basically, let's pray that Washington gets its act together and raises the ceiling, or else we're in for bad times. And lastly, a funny quote :) I could end the deficit in 5 minutes.   You just pass a law that says that   anytime there is a deficit of more   than 3% of GDP all sitting members of   congress are ineligible for   reelection.   - Warren Buffett" The way it actually works is that low-but-steady inflation (ie: printing of new dollars without any debt behind them) keeps the debts serviceable.  In real life, unfortunately, too little of the money supply is printed rather than lent into existence. "Both explanations are partly true. There are many investors who do not want to sell an asset at a loss.  This causes ""resistance"" at prices where large amounts of the asset were previously traded by such investors.  It also explains why a ""break-through"" of such a ""resistance"" is often associated with a substantial ""move"" in price. There are also many investors who have ""stop-loss"" or ""trailing stop-loss"" ""limit orders"" in effect.  These investors will automatically sell out of a long position (or buy out of a short position) if the price drops (or rises) by a certain percentage (typically 8% - 10%). There are periods of time when money is flowing into an asset or asset class.  This could be due to a large investor trying to quietly purchase the asset in a way that avoids raising the price earlier than necessary.  Or perhaps a large investor is dollar-cost-averaging.  Or perhaps a legal mandate for a category of investors has changed, and they need to rebalance their portfolios.  This rebalancing is likely to take place over time.  Or perhaps there is a fad where many small investors (at various times) decide to increase (or decrease) their stake in an asset class.  Or perhaps (for demographic reasons) the number of investors in a particular situation is increasing, so there are more investors who want to make particular investments.  All of these phenomena can be summarized by the word ""momentum"". Traders who use technical analysis (including most day traders and algorithmic speculators) are aware of these phenomena.  They are therefore more likely to purchase (or sell, or short) an asset shortly after one of their ""buy signals"" or ""sell signals"" is triggered.  This reinforces the phenomena. There are also poorly-understood long-term cycles that affect business fundamentals and/or the politics that constrain business activity.  For example: Note that even if the markets really were a random walk, it would still be profitable (and risk-reducing) to perform dollar-cost-averaging when buying into a position, and also perform averaging when selling out of a position.  But this means that recent investor behavior can be used to predict the near-future behavior of investors, which justifies technical analysis." "We are exactly where we should be for pricing. We are not over valued.  The largest bull market in history is following the longest stagnation in history, we're merely playing catch up. Of course, it was spurred after Trump won because the business sector assumed he would curtail regulation - one thing we're pretty sure he'll accomplish because his business interests are alligned.  Recommended reading outlining why we are appropriately valued: Stocks for the Long Run by Jeremy Seigel, Prof of finance at Wharton.   I'm all for looking out for people's benefit. As an investment advisor, I have to abide by the fidicuary rule myself. I'm sure there's another side to the argument for them removing the rule. As Robert Shiller, Nobel laureate in economics, put it, ""We need the right regulation, not more or less."" Perhaps it's not correct in it's current state. But I'm not a legislative expert, maybe someone can elaborate.  We need to be wary about how quick we are to judge on these rulings. Many comments are not experts and our confirmation bias will drive people to misinformation. We judge ourselves on our intentions and others on their actions." There are some important thing you need to understand about bonds, and how they work:  * A bond doesn't need an active market - like a stock, for example - to have value.    * Nonetheless, there exist active markets for all of these bonds.    * The purpose of buying these bonds was not to step in due to the absence of a market.  Rather, the purpose was to deliberately bid up the price of these bonds (ahead of the market), causing their price to rise and yields (interest rates) to drop.  * The Fed can hold any and all of these bonds to maturity, while receiving contractual payments all the while, and never sell a single bond back to the market. I mean, at a personal level, I do this all the time. I will absolutely take advantage of low interest financing offers if I know I can make more money with the outstanding balance than will be drawn in interest.  It can also make sense from a risk management perspective: I need liquidity even if I can cover the cost, I anticipate needing a large sum of cash over a short interval during the finance period. If I were to pay all upfront the cumulative expenditures would Darwin me too close to my safety threshold for my comfort level, but by financing I can distribute the risk and keep a higher margin for error over the course of the loan.