What Morningstar analysts are hearing about Treasury yields.
Spread sectors--industry lingo for just about anything that typically yields more than a Treasury--caught fire shortly after the worst effects of the financial crisis appeared to have cleared the bond market. The rally has had many supports, including a persistent wave of cash flowing into bond mutual funds. The tally for the first half of 2011 registered $92 billion, rounding out a total of $685 billion inflows since December 2008.
The U.S. Federal Reserve has played its part, too, putting a fix on short-term rates at roughly 0.25% over that same stretch since 2008. The Fed has also drained supply from bond markets over that same period via quantitative easing, by purchasing mortgage securities and Treasuries totaling more than $2.3 trillion. Meanwhile, the creation of new securities from the nonagency mortgage securities market has all but come to a standstill, while hundreds of billions of dollars worth of bonds have been taken out of circulation by defaults and refinancings. And while the financial system has pulled back on its overall leverage since the heady precrisis days, the Fed's short-rate policy has encouraged investors to borrow short (for next to nothing) and invest "long"--with every extra bit of yield producing more "free" return.
The net result has been excellent performance for non-Treasury sectors, to the point that their own yields are approaching historically tight levels relative to Treasuries--which many investors worry are already overpriced.
"We can discern a considerable decline in the net supply of a variety of higher-quality fixed-income sectors, particularly those associated with the securitization markets. ... Thus, even with the spike in Treasury bond issuance ... we expect total net fixed income supply to decline after 2010, and to remain well off its 2007 peak."
BlackRock Currents, Winter 2011