Treasury Draws Negative Yield for First Time
October 25th, 2010Via: Bloomberg:
The Treasury sold $10 billion of five-year Treasury Inflation Protected Securities at a negative yield for the first time in the history of U.S. debt.
The securities drew a yield of negative 0.55 percent, the same as the average forecast in a Bloomberg News survey of 7 of the Federal Reserve’s 18 primary dealers.
Posted in Economy | Top Of Page
I’m trying to understand this point, so tell me if I got this right.
When the Fed buys US debt, it basically just prints the money, pumping more money into the economy, which causes inflation. This is different from other parties buying the debt, since there the money is merely shuffled around in the economy.
Because the Fed has been buying debt, there’s an expectation of inflation, meaning that negative yield securities become a viable option, protecting the money from the full effect of the inflation.
Is that right?
Here’s a much clearer explanation of what’s happening:
http://www.nytimes.com/2010/10/26/business/26bond.html
At a time when savers complain that they are earning almost no interest from their bank accounts, some investors on Monday bought United States government bonds that effectively had a negative rate of return.
Bizarre as it sounds, that is correct. In an auction of a special kind of five-year Treasury bond, investors paid $105.50 for every $100 of bonds the government sold — agreeing to pay the government for the privilege of lending it money.
The reason is that these types of bonds offer a guaranteed protection against inflation. So, if inflation soars — as some economists worry might happen, with the government seeking to give the economy a boost by flooding it with money — the value of the bonds would go up accordingly.
The investors who took part in the $10 billion auction are betting that inflation, now at about 1 percent annually, will rise to a level that more than compensates for the premium they paid.
That is bizarre alright. This should be illegal. Selling Treasuries with a negative return. Welcome to the next Weimar Republic to be. It’s yet another SPECULATIVE bubble! that the U.S. Treasury! is creating. Gawdess help us all.
Don’t these “investors” ever get tired of betting on things going bad for other people, and hoping to make money off it?
Let’s see, in the last few years I’ve seen bubbles on wheat, natural gas, oil, blah, blah, blah.
When people starting betting against U.S. Treasuries, and are HOPING for INFLATION methinks we have entered into a Very Dangerous Era.
Just think what will happen to the U.S. dollar when these gamblers are disappointed that their bets didn’t pay off?
Are they going to suck it up in loyalty to the dollar? You betcha they won’t. And so bye-bye dollars. These gamblers will MOVE ALONG to the next and best money making feast.
@Kevin
Thanks for that bit. It’s much clearer.
@Eileen
At this point, inflation may be necessary. After all, a devaluation of the money means that the outstanding debt is worth less and so easier to pay off.
Of course, you could question whether it was such a good idea to borrow so much in the first place, but who are we to doubt our great leaders :/