Why are nothing-yielding US Treasuries so popular?

February 22nd, 2009

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One of the thing that confounds us is the fact that short-term US government bonds are yielding almost nothing. A 10-year US Treasury bonds yields a measly 2.79% while a 30-year bond yields 3.57%.

There are two common explanations for such a curious phenomena:

  1. It’s a flight to ‘safety’
  2. The market is pricing in price deflation in the US

With the US printing money and its government fallen in trillions of dollars worth of debt (see How is the US going to repay its national debt?), why are investors still pouring money into government bonds that are pretty close to junk?

Isn’t it obvious that the ridiculously low long-term US Treasury bonds is in a bubble? Marc Faber once said, “It’s time to short US government bonds, BIG TIME!”

Well, we have found a very good explanation for that. Remember in Bernanke ticking off another inflation trick- buying Treasury securities, we said that Ben Bernanke was suggesting that the Fed buys up US Treasury bonds? Basically, the Fed is creating money out of thin air to prop up the prices of these bonds. Therefore, what is there to fear if bond yields are ridiculously priced?

With that in mind, even mainstream investment analysts are recommending such junk government bonds. In Treasuries still strong: Merill Lynch, it reported that

Stephen Corry, Merrill Lynch, chief investment strategist for global wealth management, believes that the US Federal Reserve cannot allow Treasury yields to climb much higher than its current levels of around 2.6 per cent.

Consequently, we are seeing the weird situation whereby both gold and US Treasuries are going strong. Our bet is that gold will win eventually.

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