Bond Brief: Risk Returns

But Smith argues that if Treasuries are the best place to invest, since they give the highest return for the least risk, then they're not overpriced.

The only thing that will take foreign investment dollars out of Treasuries is protectionist legislation out of Washington," Smith says.

It's up for debate whether such legislation would actually become law, but in an election it's hard to deny that politicians may beat the drums of economic protectionism in exchange for votes. Countries like China and members of OPEC may not feel like loaning the U.S. money in the form of Treasury buying if they believe they will be kept from direct business investment in the U.S.

The Federal Reserve reported that foreign holdings of treasury and agency debt rose by $5.24 billion over the past week, with Treasuries seeing a pop of $4.435 billion to a daily average of $1.128 trillion. Foreign investors hold more than half of all Treasury debt.

In the day's economic reports, the Commerce Department said that personal income rose by 0.3% in February, down from a 0.7% gain in January and less than the 0.4% rise forecast by Wall Street economists. Personal spending rose by 0.1%, vs. expectations for spending to remain flat, but January's 0.9% jump was downwardly revised to a 0.8% gain.

More importantly, the personal consumption expenditures number, one of the Fed's favorite inflation measures, was flat and the core PCE number rose by 0.1%, after a 0.2% gain in January. This leaves core-PCE growth at 1.8% year-on-year, below the Fed's 2% estimate for 2006.

Central bankers are watching core inflation rates to see whether higher energy and commodity prices have worked their way into core prices.

Thomas Hoenig, president of the Kansas City Fed, said in a speech Friday morning that inflation will remain at the current level in 2006, and that the core inflation rate is "encouraging."