Forest fireInvestors who were shell-shocked from the financial crisis thought they were seeing some light just a few months back. Tentative signs even indicated that hiring was picking up as corporate profits boomed.

But growing evidence of a renewed slowdown over the last few months seems to have shattered the little confidence that had been rebuilt. And investors are now pouring into safe-haven assets like U.S. government debt, pushing yields on the benchmark 10-year bond to rock bottom levels last approached during the depth of the financial crisis.

Investors scrambling to safety at current prices, though, could be heading toward much more risk than they realize. While fears of deflation have been widely paraded, actual evidence of collapsing prices is starkly absent. And some of the shrewdest investors have been exiting Treasurys even as others stream in.

Hardly a Sure Thing

Even with their meager yields, safe assets like Treasurys are a great place to be amid falling prices, of course. The steady income stream rises in its purchasing power, and the lender can see their principal returned upon maturity.

Still, despite the certainty that those tiny yields imply, falling prices are hardly a sure thing. And as with momentum-chasing in other markets, investors need to be careful not to read the piling-on that higher prices can lead to as an airtight verdict on the broader market.

And rallying Treasury prices rather than real signs of deflation may well be what's driving the massive inflows of funds.

Indeed, U.S. producer prices actually climbed 0.2% in July, following an edge up in consumer prices announced last week.

Prices are holding up well overseas, too. Inflation in the fast-expanding U.K. economy is clocking in above 3% -- well above the Bank of England's comfort zone -- thanks partly to a hike in the value-added tax earlier this year.

And despite fears of a deflationary spiral in Europe following a sovereign debt crisis, prices on the Continent lifted to the highest level in 20 months because of climbing energy costs. Excluding energy, prices were still up 1.1% in July following a 0.9% gain in June.

Big Players Who Are Exiting


The reemergence of inflationary fears that were rising quickly earlier in the year could lead to tumbling Treasury prices and a reversal in momentum.

And as funds flow in to prop up prices for the time being, that two prominent investors have been paring back their positions is probably not resonating with the market the way it should.

China reduced it holdings by a record $21.2 billion in June, according to a report released today. And Pimco, the world's largest bond fund, cut its holdings of U.S. government-related debt sharply to 54% of its total from 63% over the same period.

Fearing a double-dip recession, many investors might be racing into what looks like a port in the storm. But if the surprise is to the upside instead, they could be taking on big risks instead.

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rgkarasiewicz

Better to be burned by Treasuries than raped by a rigged stock market and insolvent banks.

August 18 2010 at 4:37 PM Report abuse rate up rate down Reply
dantanczos

shouldn't it be treasur"ies"?

August 18 2010 at 2:04 PM Report abuse rate up rate down Reply
davidl7082

Our governemnt accounting being what it is, the Feds have no clue as to their actual obligations but no doubt it is far greater than we are led to believe. Lending your money to the government at zero interest is certainly a much better proposition than passing it through the Wall Street casino where it will disappear in a heartbeat.

August 18 2010 at 1:48 PM Report abuse +1 rate up rate down Reply
ultraz2

There is no deflation, the only deflation needed in the USA is for high intrest rates which banks are ripping off customers on, NEED TO GO DOWN, and Government spending such as the BLOATED OUT OF CONTROL DEFENSE BUDGET, NEEDS TO DECREASE

August 18 2010 at 12:53 PM Report abuse -1 rate up rate down Reply
cl9dr

THE OMBA ADMINSTRATION GOT DOUBLE INFLATION IN LESS THAN 18 MONTHS'AS THE COMPUTER' WEATHER YOU BUILD OR TRY TO TEAR DOWN THE PRESIDENT; DOES IT MEAN THAT MUCH FOR THE REPUBLICN TO WIN what; SOME OF THE PEOPLE RATHER BELEIVE A LIE THAN THE TRUTH;BUT WHO IS THE LOSER IN ALL THIS CONFUSION; PRESIDENT STILL GOING TO BE THE PRESIDENT'ITS ALL ABOUT POWER 'REPUBLICAN HAVE A MAGIC WAND; ARE THEY NOT GONG TO HELP THE PRESIDENT IF THEY ARE FAVORED;ARE THEY GOING TO ABLE TO TURN ECONOMY ARROUND IN 18 MONTHS; PEOPLE ARE WORKING'REMEMBER THE ECONOMY HAS BEEN GETTING WORSER ' AND WAKE UP CALL;;; REPUBLICAN KNEW THIS ;I AM 60 YEARS OLD I REMEMBER ;TRYING TO GET CONTROL OVER THE PRESIDENT ;WELL THIS IS NOT THE BIG ONE ELECTION;JUST FOR MORE BAD SENATORS'WHY ARE WE PUTTING THEM IN OFFICE FOR AND THEY GOT ALL THIS CONFUSION GOING ON ;YOU DO WHAT YOU ARE; IF THEY ARE FAVOREDTHINGS ARE NOT GOING TO GET ANY BETTER ITS TAKES TIME ' YOU WANT THE BUDGET . TO CHANGE LIKE A FAST FOOD RESTURANT;; I KNOW YOU BETTER LAY OFF THE PRESIDENT' WHAT YOU SAY AND DOYOU HAVE TO PAY FOR IT ;LOOK ARROUND THE WORLDTROUBLE IS IN THE LAND.PEOPLE FROM OTHER COUNTRIES WARNING THE US,

August 18 2010 at 12:32 PM Report abuse -1 rate up rate down Reply
1 reply to cl9dr's comment
Dismayed

Another mumbo jumbo Obama accolyte speaking nonsense.

August 18 2010 at 2:28 PM Report abuse -1 rate up rate down Reply
Gumby

The Federal government is in deep hock of $13 trillions. It needs every excuse to get the 10 and 30 year Treasurys much lower than 2 - 4 % to probably 1-3 % or less so that it can handle the debt easier. We have deflation chiefly because of high unemployment due to energy shortages.. We are outsourcing jobs to reduce our energy consumption.. Workers overseas dont consume one fifth as much energy as an average American .

August 18 2010 at 12:31 PM Report abuse -1 rate up rate down Reply
usapaydirt

The US has been in the red since the civl war, so essenualy we haven`t had any assets with which to back up our paper. When I accept legal tender for payment, I do so knowing that when I spend it, it will spend!!!

August 18 2010 at 11:54 AM Report abuse rate up rate down Reply
haydensllc

simple matter of fact, anyone with a brain knows printing money with no assets to back it is STUPID! This administration is much worse than the last one. double dip is already here for the uninitiated and will be for quie a while. DO NOT INVEST in anything but cash. keep the thievin mortgage houses and bankers from paying you 1/2 point on hundreds of thousands of dollars and charging your friggin brains out on late fees and credit cards. it's time they return the tarp money and flat ass go under!

August 18 2010 at 11:26 AM Report abuse +1 rate up rate down Reply
3 replies to haydensllc's comment
jmfishrmn3

Why is China and PIMCO reducing its holding? PIMCO had 63% of its assets in bonds so it is prudent to spread the risk? China could have a variety of reasons to reduce it investment as well; one is to focus on the billios of people and the infrastructure to support them. At this point I doubt it is a battle for world economic power because I think we are in survival mode. Inflation, deflation, employment and the housing market they seem to be related. The fed printed about 1.6 trillion since 07 and most of it is in banks. Why is that? Could it be that in 2011 there will be more ARM's comming up for renewal than when this began and will this cause another housing market collapsed and hurt the finance industry? Is this a reserve against the losses that will happen? Will this be enough to weather the storm? Geithner wants to change the feds housing policy because he doesn't want a system where private gains are subsidized by taxpayer losses. That sounds good but is he really worried about 2011? If he is it is too late because there Washington will not address this in time. Geithner may just want to look good. I am not sure that TARP or the fed involvement in housing has solved the problem. I think the policies keep home prices inflated. If that is the case then we have had inflation because we avoided deflation, so far. I think the real battle ground lies ahead in 2011 with employment and the ARM's that are comming due. The fed now backs 90% of the home mortgages and if that market takes another hit there will be a lot of painful adjustment. Since the banks are not lending it would be hard for inflation to hit because the money not really in circulation. Are the banks using it to protect their ballance sheets and if they survive 2011 how will they profit from it a year or two from now? The banks need the fed to keep rates next to nothing. The fed needs the financial institutions to survive and this is a ballancing act like we have never seen before.

August 18 2010 at 11:10 AM Report abuse rate up rate down Reply
rgkarasiewicz

Better to be burned with Treasuries than scorched with the rigged stock market and the insolvent banks.

August 18 2010 at 11:06 AM Report abuse rate up rate down Reply
1 reply to rgkarasiewicz's comment
tjdwil

you should just put it in El Banco De Posturpedico

August 18 2010 at 11:25 AM Report abuse +1 rate up rate down Reply