“Bubbles are born of greed; this is fear,”

More on the Flighty To Safety and a possible bubble on Bloomberg:

By Daniel Kruger

Jan. 1 (Bloomberg) -- Treasuries recorded their biggest annual gain since 1995 as falling stocks and frozen credit markets drove investors to the relative safety( FLIGHT TO SAFETY ) of U.S. government debt.

Yields of all maturities touched record lows as financial firms’ losses in the credit crisis exceeded $1 trillion and policy makers made unprecedented moves to rescue the country from recession. Foreign companies and institutions increased their stake in U.S. government debt by 29 percent in the first 10 months of the year, Treasury Department data shows.

“It’s one heck of a run for 2008,” said George Goncalves, chief Treasury and agency strategist with Morgan Stanley, one of 17 primary dealers that trade with the Fed. “The capital markets are going to be about the Treasury market next year.”

Treasuries returned 14 percent in 2008, according to Merrill Lynch & Co.’s Treasury Master index. It was the best performance since 1995, when they rose 18.5 percent after the Federal Reserve began lowering its benchmark interest rate from 6 percent. The Standard & Poor’s 500 Index lost more than 38 percent for the year, the most since 1937.

The U.S. economy entered a recession in December 2007, the National Bureau of Economic Research said this month. The Cambridge, Massachusetts-based group sets dates on U.S. business cycles. The slump began about four months after financial markets started seizing up as rising defaults on subprime mortgages began to affect the value of other assets in the credit markets.

‘Most Trying Year’

The Fed cut its target rate for overnight lending between banks to a range between zero and 0.25 percent, from 4.25 percent at the start of the year. It rescued insurer American International Group Inc. and committed $8.5 trillion to sustain the economy.

The Treasury put mortgage-finance companies Fannie Mae and Freddie Mac into conservatorship, purchased bank stock and bailed out automakers General Motors Corp. and Chrysler LLC. It spent half of a $700 billion bank-rescue fund, the Troubled Asset Relief Program, authorized by Congress.

Policy makers let Lehman Brothers Holdings Inc. collapse in September, sparking a panic about the safety( GUARANTEES. BRAVO! THAT'S IT. ) of financial institutions.

“This has been the most trying year that most people will ever live through,” Ray Remy, head of fixed income in New York at Daiwa Securities America Inc., another primary dealer, said yesterday. “Time to end it.”

The tumult is unlikely to be over. The U.S. said it may sell as much as $2 trillion in debt to fund various bailout and stimulus packages and the U.S. budget shortfall.

‘Tons of Supply’

The year will open with the auction of $8 billion of 10- year inflation-indexed securities on Jan. 6, a sale of three- year notes on Jan. 7 and an auction of 10-year notes Jan. 8; the size of the note sales has yet to be announced.

“Next week we have tons of supply, so the market has to pay attention to that,” Remy said. “As soon as we walk in here on Monday, I would imagine the selling will start.”

Demand for Treasuries last year reached the “bubble” phase seen in technology stocks in 2000 and real estate in 2006, David Rosenberg, chief North American economist at Merrill Lynch, wrote in a research note Dec. 1. He forecast the 10-year note’s yield could fall below 2.3 percent, which it did for the first time barely two weeks later.

“This next leg down in yield will undoubtedly represent the classic mania-turn-to-bubble phase( I HAVE TO SAY THAT I AGREE ),” New York-based Rosenberg wrote.

With the economy losing 1.9 million jobs in the first 11 months of 2008, according to Labor Department data, others saw different factors behind the record low yields.

‘Nowhere Else to Run’

“Bubbles are born of greed; this is fear( CORRECT. FEAR AND AVERSION TO RISK AND THE ACCOMPANYING FLIGHT TO SAFETY. ),” T.J. Marta, a fixed-income strategist at RBC Capital Markets in New York, said this week. The firm is the investment-banking arm of Canada’s biggest lender. “There’s nowhere else to run( A CALLING RUN ) at this point. This is a lot more like Japan in the 1990s or the U.S. in the 1930s than the U.S. in the 1980s or 1970s.”

Foreign entities hold $3.04 trillion in U.S. securities, about 52 percent of marketable Treasury debt. That’s up 29 percent from $2.35 trillion they owned the end of 2007, according to Treasury Department data.

The Fed’s custodial holdings of Treasuries for foreign entities including central banks rose 37 percent in 2008 to $1.68 trillion as of Dec. 24, the largest jump since at least 1984.

The central bank’s custodial holdings of so-called agency securities, including mortgage securities issued by Fannie Mae and Freddie Mac, fell( ONLY IMPLICIT GUARANTEES ) 0.6 percent to $825 billion, the first decline since at least 2001 when the Fed began reporting the data. Agency holdings had risen between 22.7 percent and 53.3 percent in each previous year.

TED Spread

Yields indicate the Fed’s interest-rate reductions have made banks more willing to lend than earlier in 2008. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 1.35 percentage points yesterday from 4.64 percentage points in May. That was the most since Bloomberg began compiling the data in 1984.

Ten-year Treasury note yields will climb to 3.4 percent by the end of 2009, according to a Bloomberg survey of 58 economists, with the most recent forecasts given the heaviest weighting.

The Securities Industry and Financial Markets Association recommended that Treasuries markets be shut around the world today for the New Year’s Day holiday."