Transcripts

The Federal Reserve's Long-Term Treasury Buys Begins

PAUL KANGAS: The Federal Reserve began purchasing long-term Treasuries today, in an effort to bring down borrowing costs. It's the first part of the Fed's plan announced last week to buy $300 billion in Treasuries along with almost $1.5 trillion in housing debt. But as Erika Miller reports, some experts see big risks brewing in the bond market, including the possibility of a bubble.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: In the 1630's, it was tulip bulbs. In the late 1990's, it was Internet stocks and earlier this decade, housing. Now some investment pros like Warren Buffett worry there's another bubble brewing, this time in U.S. Treasuries. The stock market meltdown has sent investors fleeing to the safety of U.S. government debt even if it means paltry returns. But there are concerns Treasuries could start to lose their luster, if there's a sharp jump in inflation as a result of an economic rebound. Others worry about inflation coming from ballooning government deficits to finance the stimulus and financial relief efforts like today's Treasury bond purchase. But most credit market experts are not worried inflation these days. Many, like Barclay's Ajay Rajadakhysha, think the air will come out of the bond market but in a healthy way.

AJAY RAJADHYAKSHA, US FIXED INCOME STRATEGIST, BARCLAYS CAPITAL: More likely, it deflates slowly over the next several quarters. And it's only by the middle of next year when people start becoming a lot more confident about the fact that the economy has genuinely turned, that you start to see it bursting.

MILLER: The risk however, is that there's a panic-driven flight similar to past bubbles. Experts say one way that could happen is if foreign investors become fearful about owning U.S. government debt. China, the world's largest holder of U.S. Treasury bonds, has already expressed concern about the safety of its investment. But interest rate strategist Suvrat Prakash says currently there's no safer alternative.

SUVRAT PRAKASH, INTEREST RATE STRATEGIST, BNP PARIBAS: People would typically substitute Treasury debt for other investments that yielded slightly more, let's say European government debt, emerging market debt and agencies and triple-A corporates. Now the question is up in the air over all of that. We don't even know if bond rating companies have been placing those ratings correctly.

MILLER: Unlike other manias which were rooted in greed, enthusiasm for Treasuries is being driven by fear. So ironically it's the quest for safety this time that's creating the risk of a bubble. Erika Miller, NIGHTLY BUSINESS REPORT, New York.