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Long-term treasury yields have been going down fairly continuously since the mid 1980s. Right now, the 30-year yield is under 3%, meaning that it is likely to barely keep up with inflation if held to maturity.

What long-term secular trends are causing this huge rise in long-term Treasury prices and collapse in yields? Why would anyone in their right mind buy a U.S. Treasury nowadays except as a short term parking place for their money? Since long Treasuries aren't as safe a parking place as short ones, why would anyone buy these, period?

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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.

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  • @mehasse: Right, the yield is much higher on long than short Treasuries, but if you plan on selling them before maturity then they're not actually very safe and if you have a 10- or 30-year time horizon then you may as well buy stocks.
    – dsimcha
    Oct 8, 2011 at 4:01
  • @dsimcha But if you are are a portfolio manager running a billion-dollar fixed-income fund, and your fund's composition is explicitly specified in the prospectus as a bond fund with a longish avg maturity, or you are required by state retirement funds to have a relatively conservative, mostly income (not growth) type asset allocation, then you will not be able to buy stocks. See the last paragraph of money.stackexchange.com/questions/11446/…
    – Ellie Kesselman
    Oct 8, 2011 at 16:55
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    @dsimcha: If you believe in a protracted global recession, then it's not so risky to hold long-dated bonds. Also, please note my first sentence, "I believe that it's largely irrational".
    – Mark E. Haase
    Oct 10, 2011 at 0:33
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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:

  • They are used as hedges for arb strategies.
  • Many fixed-income (bond) mutual funds and pension portfolios have maturity (or duration) requirements. Yield is not easy to find. Choices are limited to short-maturities or speculative "junk" bonds. To satisfy portfolio requirements for maturity length and overall risk, there are few alternatives to the 30-year long bond as a safe, liquid means of adjusting aggregate investment holdings, yet with low transaction costs.
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  • W.r.t. bond funds, that does beg the question: Why would anyone invest in a long Treasury fund right now? I don't even buy that it's a "safe" investment at these prices given the severe risk of not keeping up with inflation.
    – dsimcha
    Oct 7, 2011 at 13:21
  • @dsimcha I personally wouldn't buy long bonds right now. I agree with you. But see the last sentences of my answer. That's one reason why investors would choose T-bonds, in the past AND present. Re inflation risk exposure: The U.S. has experienced long intervals of low inflation, even DEFLATION, during the past 20 years (unlike the 1970's-mid 1980's. I'll try to provide a citation to corroborate that, please forgive). So erosion of value due to inflation has been low. Thus bonds, including 30-year US Treasuries have remained attractive to investors. Result? A long secular bull market.
    – Ellie Kesselman
    Oct 8, 2011 at 17:14
  • Does this really make sense? Once the US needs to print money just to pay off T-bonds, that will increase inflation (in addition to any other factor driving inflation). That's essentially the same as a (partial) default. I.e. whether through inflation or default, your bonds are worth less than what you paid for them. EU vs US makes no difference in that respect. The 100% GDP debt of the US, versus 85% in Germany is a real difference though.
    – MSalters
    Oct 10, 2011 at 13:47
  • @MSalters You are correct, going forward, I agree w/you. But looking backward, at a 20-30 year time horizon, which is what a long secular bull market means, I think my answer makes sense. But it may not continue to make sense soon, and the long secular bull market in US Treasuries is unlikely to continue indefinitely!
    – Ellie Kesselman
    Oct 12, 2011 at 14:48
  • "The U.S. dollar is a fiat currency, so the US won't go bankrupt." what? The EURO is a fiat currency too...........
    – CQM
    Nov 13, 2011 at 17:57

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