The only assets that anyone wants to own right now are US Treasuries. The embedded assumption is that we are Japan…except that, unlike Japan, we will force all our companies to default, thus crushing private-market stockholders and bondholders. So far better to lend money to a frighteningly leveraged government for 30 years at 3% than take any risk of default.
As for the other risk that creams bondholders: inflation. It’s safely off the radar now, and probably will be for a while (as the price of every asset in the world plummets). But don’t underestimate the desire of Ben Bernanke and the rest of the government to inflate our way out from under our debt mountain. And don’t underestimate the heroic efforts they are going to to do it.
Will these produce hyper-inflation in the short term, crushing everyone who is now fleeing to Treasuries? Probably not. Someday? Almost certainly. So as you flee to safety, at least remember that that life-raft you’re swimming toward might just turn out to be an ice floe.
US Treasuries are the investment asset of the year. The less they yield, the more their fans adore them. Then, again, these fearful days, yield seems to have nothing to do with investment calculation. Purported safety is all.
“Super-safe Treasuries”, the papers call these emissions of a government that, this year, will take in $2,500bn but spend $3,500bn. “Toxic assets” is how the same papers characterise orphaned mortgage-backed securities—or, for that matter, secured bank loans, convertible bonds, junk bonds or almost any other kind of debt obligation not bearing the US imprimatur…
The truth is that no investment asset is inherently safe. Risk or safety is an attribute of price. At the right price, a lowly convertible bond is a safer proposition than an exalted Treasury. Watching the government securities market zoom, many mistake price action for price…
Yes, Treasuries might conceivably redeem the hopes of their besotted admirers. Maybe a deflationary chasm is about to swallow us all. Never before has the US been so leveraged. And—just possibly—never before were lending standards so reckless as the ones that brought joy to so many astonished mortgage applicants in 2005 and 2006…
[But] what I observe is a monumental push to reflate. The Federal Reserve is creating more credit in less time than it has ever done before – in the past three months the sum of its earning assets, known in the trade as Reserve Bank credit, has grown at the astounding annual rate of 2,922 per cent. Are the bond bulls quite sure that these exertions will raise no inflationary sweat?
Evidently, they are—at least, forward swap rates betray no such concern. The market’s best guess as to what the 10-year Treasury will yield in 10 years’ time is 2.78 per cent, never mind the famous (and now, as it seems, prophetic) remark of Fed Chairman Ben Bernanke that the Fed could drop dollars out of a helicopter in a deflationary pinch…
“Risk-free return” is the standard tag attached to the government’s solemn obligations. An investor I know, repulsed by prevailing government yields, has a timelier description – “return-free risk”.
None of which, of course, will stop long Treasury yields from dropping to 1%, at least temporarily. It happened in Japan. It’s about time we stopped saying “it can’t happen here.”
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