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In spite of months of gloom-and-doom forecasts, the humble Treasury has persevered. So far this year, the government security has outperformed most other bonds. But as Treasuries rally yet again, it raises the question: Are the doomsayers wrong?

All of the factors that would topple Treasurys have yet to materialize, and the bonds are up a surprising 4% in the last two months, more than four times better than high yield bonds. Economic reports have been weak, oil prices have stayed high, and home prices have continued to fall. Given the circumstances, investors have grown worried about the strength of the economic recovery, and a Treasury-killing interest rate increase from the Fed seems farther away. "We saw a lot of expectations about the economy change this spring," says Jeff Tjornehoj, a senior analyst for Lipper. "It's been a good turn of events for Treasury investors because people have sought the safety instrument."

The question remains: How long can it last? After a pullback in the first part of the year, Treasurys gotten a second wind. Meanwhile, experts still expect an interest rate hike in the near future at least in part because the near-zero rates have nowhere to go but up. The first test will come later this month, when the Federal Reserve ends its Treasury buying program. The loss of such a huge buyer could cause prices to fall and send yields slightly up.

 

Markets Hub: What's a Bond Holder to Do?

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Bond yields have slumped to historic lows, meaning anyone who invests now may be getting a poor deal. Brett Arends joins the Markets Hub to discuss.

In spite of the recent rally, many big investors and advisers are sticking to their pessimistic guns. Co-founder of bond behemoth Pimco, Bill Gross has been bearish on Treasurys for months and has yet to recant. There isn't much value left for performance-chasing investors, says Anthony Valeri, a fixed income strategist for LPL Financial: Treasurys now are "very expensive," he says. He also thinks investors have overreacted and prices are bound to come back down, especially if economic growth accelerates again. Today's lower yields also make Treasury bonds even less appealing for investors worried about inflation: their real yield, or their yield above inflation, is down to 1.6% from 2.8% in February. Another reason to sit out, offers Tjornehoj: "People have jumped in with both feet, and that often indicates an overheated market."

Of course, even the most skilled investors often fail to call market tops. Both Tjornehoj and Valeri say they wouldn't be surprised if Treasury yields continued to decline for another month or so while investors wait for some sunnier economic forecasts. But trying to squeeze out those last gains could prove costly, says Frank Martin, a financial adviser in Elkhart, Ind., and author of "A Decade of Delusions," a book on financial lessons of the last decade. "I'd rather catch the long term trends," says Martin. "The price of being wrong is just simply too high."