Some short-term treasury bonds available last week in the US are tagged as zero, or even negative in yield.

It's definitely an extremely rare situation which one could hardly ever imagine.

Even if the US treasury is presumed to be perfectly risk-free and bank deposit interest rate is approaching zero, it remains a mystery why investors would buy treasury bonds with negative yield.

Even more puzzling is why a professional investor would display such unreasonable investment behavior.

It is est imated that the inst itut ions which flock into treasury bonds are mainly overseas investors who are forced to of f load their risky positions, yet at the same time precluded by investment guidelines from holding cash.

Other posit ive factors include topped-up position on bonds for boosting yearend performance, increasing chance of negative banking saving interest rate, and under-performance of commercial instruments.

The above explanat ions may sound unconvincing, but I don't want to force any justification. The most notable thing is: any investment opportunities behind?

Generally speaking, bond prices are reflection of market expectation on future interest rates.

Bond prices will rise if there is a downward forecast on interest rate, or if the market is negative on future economic environment.

In other words, bond prices could reveal current base rate as well as upcoming economic prospect.

The yield of longer term (five years or above) treasury tends to fall on unfavorable economic forecast and expectation for rate cut.

As short-term interest rates have been down to very low level, the yield curve steepens, which in economic theory could stimulate interest in investment and benefit stock price.

The illustration shows four treasury yield curves recorded in different economic cycles. We have found that the yield curve steepened at the end of 2003 after Greenspan cut rate to 1 percent.

Investors are reminded that the last bull market started in 2003.

In contrast, yield curve flattened before the dotcom bubble was about to burst and when the market bottomed in 2007.

The steepening yield curve is boosting our confidence on the stock market.

The author is director of Convoy Asset Management Ltd.

(HK Edition 12/16/2008 page3)