Spooked investors again rush to Treasury bonds, but for how long?

When the global economy in early April still looked like it was confidently charting a course of recovery, a 3.99% annualized yield on a 10-year U.S. Treasury note wasn?t terribly enticing to many investors.

Now, 10-year T-notes are paying just 3.20% -- and plenty of investors suddenly think that?s a fine return. They snapped up $21 billion of the securities at a Treasury auction on Wednesday.

What has changed, of course, is that confidence has quickly given way to fear this spring. Markets are dogged by serious worries about the economy and the financial system amid Europe?s government-debt crisis, stocks? recent wild swings and disappointment over the lack of private-sector job creation in the U.S. in May, among other issues.

So investors have rushed to buy Treasury securities since late April, in the process driving market yields on the bonds sharply lower. The 10-year T-note is charted below.

Yes, we?ve seen this movie before. The Treasury market ?is still the place you go when people are scared,? said George Goncalves, head of interest-rate strategy at Nomura Securities in New York.

U.S. government bonds have attracted one new fan of particular note: Newport Beach-based bond-fund giant Pimco.

Bill Gross, Pimco?s co-chief investment officer, had been warning investors away from long-term Treasuries for much of the last year, asserting that the government?s continued heavy borrowing would likely push bond yields higher, thereby devaluing older fixed-rate Treasuries.

But Pimco has changed course in recent weeks, buying Treasuries rather than shunning them. Gross says he now considers U.S. government bonds ?the least dirty shirt? to wear.

?The world is full of dirty shirts in terms of excessive debt, and the United States is one of those countries, but it still remains the reserve currency and still remains the flight-to-quality haven,? he said in a Bloomberg Radio interview last week.

Steve Rodosky, head of Treasury trading at Pimco, said the recent shift by key governments, particularly in Europe, to embrace spending cuts was a ?game changer? for the firm.

? ?Stimulate, stimulate, stimulate? has been replaced with, ?We need to tighten the reins,? ? he said.

The obvious risk in what amount to government austerity moves is that the global recovery could wane. For now, that has dimmed the attraction of riskier investments such as stocks and enhanced Treasuries? appeal.

What?s more, fiscal tightening makes it more likely that the Federal Reserve and the European Central Bank, among others, will keep short-term interest rates near rock-bottom for longer. That is making investors, including Pimco, more comfortable locking in longer-term Treasury bond yields, Rodosky said.

But with Treasury yields already down substantially, how much lower can they go?

As the chart shows, in the second half of 2009 rallies in the Treasury market drove the 10-year T-note to the 3.2%-to-3.3% range in July, October and November. The yield rebounded from there each time as the worries du jour eased.

In the grip of recession in late-2008, however, investors' demand for a haven was so strong that the T-note yield briefly fell as low as 2.06%.

Before jumping into Treasuries at these interest rates, investors have to decide just how nervous they really are about putting their money elsewhere. A 3.2% T-note yield may only look good six months from now if the worst fears about the economy have come true.

-- Tom Petruno