US Treasuries : the last asset bubble?

I enjoyed this article, entitled “The Last Asset Bubble“.

US treasuries have enjoyed an incredible rally, returning 11.2% since the end of June. This has been driven by the sub-prime debacle and the Fed’s decision to cut rates from 5.25% to 3%.

Treasuries have also been supported by panicked investors fleeing from other AAA asset classes that are no longer AAA in any real sense of the word. The article makes an interesting case that returns from US Treasury bonds have peaked, and that now is possibly the time to move some of these positions elsewhere. US Treasuries of all maturities have rallied substantially, and yields haven’t been as low since Fed Funds were at 1% under Greenspan.

Consensus appears to be that a continued easing of Fed Funds will see a continued tightening in yields, and so rising prices, in longer-dated US Treasuries. But this article cites some interesting arguments for there not being much further room for yields in US government bonds to fall as the market is already pricing in further US rate cuts. The awkward consequence of this for the Fed, if the argument holds, would be that monetary policy easing could become ineffective in terms of reducing the cost of money in the economy, or increasing liquidity.