This fueled bond investors’ purchase of US government debt. During the week of 8/23/2010 investors continued to buy large amounts of US government bonds (treasuries), while selling off stocks. Investors can usually buy treasuries directly or more commonly through bond funds. Bond funds had attracted US$559 billion industry-wide in the past 30 months through June 2010. Bonds returned 16% within that 30 month period, while stocks returned -26%. Investors had removed US$209.4 billion from domestic (US) equity funds, as well US$24.4 billion from funds that purchase non-US stocks. With the increase in price, the yield on the 10 year US Treasury note had declined to 2.41% in October of 2010, the lowest level since Dec 2008 (when it was less than 2.20% during the height of the financial crisis). This meant that equities had become cheap (i.e. stocks were selling for much less than they should have been) as investors retreated from the volatile stock markets in search of stability in US bonds. On 10/5/2010 Warren Buffett, who was a guest speaker at Fortune’s Most Powerful Women Summit in Washington, had said that it is “quite clear stocks are cheaper than bonds”. He also stated that he “can’t imagine” the rationale for adding bonds to your portfolio at the then current prices. “We are following policies that unless changed will eventually lead to lots of inflation down the road”. “We have started down a path you don’t want to go down.” Despite the Oracle of Omaha’s direct warning, US bond
purchasing continued, causing yields on 10 year US treasuries to reach near record lows at 2.17% in November 2010 (US treasuries reached near record high prices). In November the US Federal Reserve announced it is committing $600 billion to buy more government bonds/treasuries in order to stimulate the weak US economy. This was the second massively large and unconventional program of quantitative easing (money printing). US treasury prices began to fall as investor confidence began to wane. In December, US Federal Reserve chair Ben Bernanke defended the $600-billion US Treasury bond purchase plan on national television. He said the economy was still struggling to become “self-sustaining” without government help and also indicated further stimulus may be required in 2011. In the days following Bernanke’s comments, yields on 10 year US treasuries rose sharply to a six month high of 3.27%, after prices dropped in the largest two day sell off since September 2008 (when Lehman Brothers collapsed). US treasuries continued to fall through the month of December as investors reduced their bond holdings after government data (prices and trade) suggested stronger than expected economic growth in the fourth quarter and easing deflation risk. Investors had started to put money back into US equities. The yield on 10 year US treasuries rose to six month highs (prices dropped to six month lows). Retail investors withdrew a record net $US8.6 billion from bond funds during the week ended December 15.