| v> | | | | How Long Can it Last? |
| We’ve survived the tech bubble and the | | | | There is so much money shifting into Treasuries, |
| housing bubble, but are we headed for something | | | | it can’t last forever. Investors seem to be |
| more catastrophic than either of those? Some | | | | pouring money into government securities with |
| experts are beginning to fear the worst and now | | | | the same fervor that they did during the housing |
| some fear the Treasury market is venturing into | | | | surge and the dotcom mania. U.S. government |
| bubble territory. | | | | debt has always been considered the safest |
| We’ve survived the tech bubble and the | | | | investment in the world. But now some fear the |
| housing bubble, but are we headed for something | | | | Treasury market is venturing into bubble territory. |
| more catastrophic than either of those? Some | | | | The big question becomes, How long can it |
| experts are beginning to fear the worst. | | | | last? Were a bubble of this size to implode, |
| Let’s review recent financial events. The | | | | there wouldn’t be enough sand bags in the |
| meltdown in the global financial markets created a | | | | world to stop the flood of money that would |
| wave of panic and a surge of money has poured | | | | come gushing out. When the torrent was over, |
| into what has always been considered | | | | there would be so little left in the Treasury |
| safeshort-term U.S. Treasury securities. This | | | | coffers, the government would be forced to pay |
| basically means that investors are willing to put | | | | higher rates on their burgeoning debt. |
| faith in and lend money to the government. | | | | Our Foreign Debt Holders |
| Primarily because, even though our national debt | | | | If such a day of reckoning is coming, it would be |
| stands at staggering $10.59 trillion, and is still | | | | a devastating blow to the economy, and the |
| growing, the U.S. has never failed to meet a debt | | | | dollar. At the first sign of the stock market |
| payment. This sudden appetite for Treasuries has | | | | entering a sustained period of recovery, investors |
| driven yields down to their lowest levels since the | | | | would shy away from low-yield Treasuries. The |
| Great Depression. | | | | Fed could then be forced to monetize Treasury |
| Over the past couple of months, the Feds have | | | | securities, or else boost the rates higher. |
| funneled massive amounts into bailout packages | | | | But China and other foreign countries hold a |
| upsetting the government’s balance | | | | major chunk of U.S. debt. In fact, about half of |
| sheet. When you add a soaring U.S. deficit into | | | | the nation's $5.3 trillion in publicly traded debt is |
| the mix, you get a situation that’s causing | | | | held by countries like Japan and China. That means |
| sleepless nights for anyone that’s paying | | | | a significant down shift in Treasury prices would |
| attention. | | | | lead to the decline of the US dollar, a threat of |
| How Low Can They Go? | | | | hyper-inflation and finally, a depression. |
| We’ve been waiting to see just how low | | | | And yet, even though the U.S. has the dubious |
| interest rates on Treasury securities could go | | | | distinction of having kicked off the firestorm of |
| before the rapid stream of investments would | | | | global economic meltdown, our government bonds |
| dry up. It now appears that even zero is not | | | | are still considered the safest investments in the |
| too low. One day during the second week of | | | | world. |
| December, the annualized yield on three-month | | | | What’s in Store? |
| T-bills in the secondary market hit the minus zero | | | | Just like we all thought that the price of homes |
| level, down to negative 0.01%, then later that | | | | could only go up, we now know that it’s |
| same day it rose to positive 0.01%. | | | | that kind of irrational exuberance that blind us |
| This means that investors are so fearful of the | | | | what’s coming. Jim Grant of Grant's |
| markets, but still have enough faith that the U.S. | | | | Interest Rate Observer recently commented on |
| government, they are willing to risk getting less | | | | CNBC, "There's more risk in things people think |
| money upon maturity than they originally | | | | are inherently safe, including cash and Treasuries, |
| invested, and earn no interest along the way. | | | | vs. the things people perceive as risky." |
| The Treasury hasn't had to auction new T-bills at | | | | It appears that even though Treasury yields are |
| a negative rate yet, but on December 8, they | | | | at an all time low, even institutional investors are |
| actually sold $30 billion in four-week T-bills at a | | | | more concerned about preserving capital than |
| yield of exactly zero. Anyone who bought those | | | | they are in getting higher returns. Treasury |
| can sell them in four weeks, but not for one | | | | interest rates are already at or near zero. |
| penny more than they paid for them. At that | | | | If things get worse, and they slip further into |
| rate, you could have just as easily stuffed a | | | | negative return territory, would investors actually |
| fistful of $100 bills into a coffee can and buried it | | | | be willing to pay the government to hold their |
| in the back yard. | | | | money for safe keeping? So far, there is no |
| You might be wondering who would be willing to | | | | indication that things will get that dire. Although, |
| buy Treasury debt for little or no return? It | | | | since none of the rules we’ve lived by |
| turns out that there were plenty lined up to | | | | these past few decades seem to apply anymore, |
| buysome who probably no longer have back | | | | we can’t speculate on the future. |
| yardsso many in fact that the Feds reportedly | | | | We think that Treasury interest rates will |
| could have sold up to four times as much as they | | | | probably remain low until some time mid-2009, or |
| did. Actually, while there are plenty of individual | | | | at least until the recession begins to lighten up. If |
| investors, it’s the big institutional investors | | | | the skittish market keeps the fear factor alive, |
| like pension funds, and international central banks | | | | people will keep moving money into the Treasury |
| that are the biggest players in the market for | | | | for safekeeping, low interest rates or not. |
| Treasury securities. | | | | |