“Treasuries have some bubble characteristics, certainly the Treasury bill does,” said Bill Gross"

I've talked about a Treasuries Bubble, which, I don't like to say this, follows from my reading of the level of fear and aversion to risk and the resulting flight to safety we now see, which beggars belief from my point of view. From Bloomberg, one of the people I listen to chimes in:

"By Michael J. Moore

Dec. 11 (Bloomberg) -- The rally in Treasuries that pushed yields on bills below zero percent this week is adding to concerns that the $5.3 trillion market for government debt is a bubble waiting to burst.

Investors seeking safety from losses in equity and credit markets charged the Treasury zero percent interest when the government sold $30 billion of four-week bills on Dec. 9, the same day three-month bill rates turned negative for the first time since the U.S. began selling the debt in 1929. Yields on two-, 10- and 30-year securities touched record lows this month.

“Treasuries have some bubble characteristics, certainly the Treasury bill does,” said Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., which oversees the world’s largest bond fund. “A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk?” he said in a Bloomberg Television interview yesterday."

That's been my view as well.

“There is basically insatiable demand for Treasury bills,” Ira Jersey, a New York-based interest-rate strategist at Credit Suisse Group AG, said in a Bloomberg Television interview. “There is a number of reasons for this, not only angst over deflation and what’s going on with risky assets, but there is also just a lot of cash that does not want to take any credit risk.”

Hunger for Treasuries increased as financial companies reported $984 billion of losses and writedowns related to the collapse of subprime mortgages since the start of 2007. The losses froze credit markets and helped send the U.S., Europe and Japan into the first simultaneous recessions since World War II.

Gross said he regrets not buying Treasuries in the past year. “If we went back 12 months and we had known then what we know now, it would have been all invested in Treasuries,” he said in the interview.

David Rosenberg, the chief North American economist at New York-based Merrill Lynch, said last week that demand for Treasuries had reached the “bubble” phase like in technology stocks in 2000 and real estate six years later."

I'm a bit surprised that the Fed has let it come to this. As you know, I think that they should be printing money.

"Record-low yields on government debt have led money-market funds to waive fees to keep returns positive. If the Federal Reserve cuts its 1 percent target rate for overnight loans between banks, as is expected next week by all but two of 56 economists surveyed by Bloomberg, some Treasury fund returns may turn negative, said Peter Crane, president of Crane Data LLC, a research firm in Westborough, Massachusetts.

Treasuries have “absolutely” entered a bubble, said David Brownlee, who oversees $15 billion as head of fixed income at Sentinel Asset Management in Montpelier, Vermont. “There is very little rationality in my mind to bills trading at zero.”

Sentiment among investors in Treasuries turned negative for the first time in four months, according to a JPMorgan Securities Inc. survey of clients. The firm’s weekly index fell to minus 6 on Dec. 8, from this year’s high of 27 a month ago. The figure is the difference between the percentage of investors betting prices will rise and those expecting a decline."

I've argued that the same dismissal of common sense and assessing fundamentals that helped the housing and stock market go up are being repeated going down. It's not a learning curve.

"Speculation that the recession will result in deflation, or a prolonged slide in prices, is also driving demand for Treasuries. Consumer prices fell 1 percent in October, the most since records began in 1947, and may drop 1.2 percent in November, according to a Bloomberg survey of economists.

Deflation may worsen the economic downturn by making debts harder to pay and countering the impact of Fed rate cuts. Deflation also makes bonds more valuable, even with yields at record lows.

Treasuries may actually be “fairly valued,” Tony Crescenzi, chief bond strategist at Miller Tabak & Co. in New York, said in a report yesterday. Even so, yields will likely rise in mid-January as investors’ focus turns to prospects for an economic recovery, he wrote.

The U.S. pledged $8.5 trillion, more than half of the country’s gross domestic product, to spur lending and limit the damage of the recession.

Economists forecast higher bond yields as those efforts take effect over the next year. The yield on the 10-year note will rise to 3.66 percent by the end of 2009 from 2.67 percent today, according to 50 estimates in a Bloomberg survey. That would result in a loss of 3.88 percent as bond prices decline.

“At some point we are going to get some signal, some indication that this massive policy response is getting some traction,” said Mitchell Stapley, who oversees $22 billion as chief fixed-income officer for Grand Rapids, Michigan-based Fifth Third Asset Management. “The flight out of Treasuries is something that will be breathtaking.”

Of course, much, as always, depends upon government policies and actual human decisions, so deflation is surely possible. I'm just saying that it needn't be so.

"The way to do so is through the shared appreciation mortgage, or SAM. " Sam I Am.

Greg Mankiw considers a proposal to renegotiate mortgages and stop foreclosures:

"I can see the attraction of these ideas, but I have two questions:

1. Would a law giving homeowners the right to write down their mortgages in exchange for equity attract so many homeowners that financial institutions would suffer even bigger hits than they already have? As these authors note, foreclosure is unpleasant for everyone. But because it is so unpleasant, some homeowners who are underwater on their mortgages keep paying them anyway. If we give them a better alternative, why would they?
2. If Congress were to pass a law allowing homeowners to rewrite their mortgage contracts, and lenders suffered losses as a result, what would the constitutional implications be? The fifth amendment says "nor shall private property be taken for public use, without just compensation." Could lenders get "just compensation" for losses that resulted because Congress crammed down an equity-for-debt swap? If so, would this be the best use of taxpayer funds?"

He then gets answers:

"In response to the first question, he writes:

The offer would come from the lender (not borrower) in cases in which there is a stop in payment on the mortgage. Offering this on top of a standard write-down is an option that is currently not in their arsenal, a fact that many of them are not aware of (essentially ruled out by the tax code). One offers incentives for the writedown e.g. by exempting the shared appreciation strip from capital gains taxes. This is then part of the workout routine that would be far more attractive than a pure write-down, and often superior to enforcing default.

Suppose someone stops payment on their mortgage without needing to just because this offer is potentially open. They can be offered some powerful discouragement: (a) Increasing share of appreciation with increasing write down; (b) Give lenders ability to check income. There would then be a high % dedicated to the loan (you won't want this if you are doing fine or expect to recover income); potentially, have payments on the mortgage rise with income if one needs to work this angle harder.

The complete incentive system could be designed in a dynamic manner, adjusting as evidence of excessive use came to light.

In response to the second question:

This would be voluntary negotiation. The idea would be to set up the incentives for it in the tax code. It simply dominates current options in most circumstances."

I would have thought that the answer to both questions would be that the lender makes the ultimate decision. If payment stops, and he doesn't feel the offer is kosher, he can foreclose. In any case, since it's a negotiation, he can say yes or no. All this program does is give government inducement for mortgage renegotiation instead of foreclosure.