Long-term U.S. treasury bills have always been a relatively safe place for investors to place their capital for decades at a time. That may no longer be the case in the coming months.
Foreign investors face a risk of devalued U.S. currency, and foreign and domestic investors alike battle the risk of inflation. We have many more Investing Help Articles Now Available.
But this risk isn’t stopping investors, who are snatching up long-term treasury bills in record numbers. In fact, the prices on long-term treasury bills recently jumped 19.9% in a single month. That drastic increase is unheard of in terms of treasury bills.
To put that into perspective, consider the following:
– The Fed Reserve was worried about deflation back in 2003, but bonds had what was then considered an enormous rebound of 13.3% in two months.
– After the 9/11 attacks, amidst thoughts that the economy would take a nosedive, bonds started rallying. On top of that, the government cancelled 30-year treasury bond auctions under the presumption that making the bonds harder to access would cause prices to skyrocket and long-term rates to plunge. Unfortunately, though, this bold move only resulted in a 9.8% gain over the following 6 weeks.
Now you can see why the recent treasury bond surge is such a big deal. Not to mention that the corresponding drop in interest rates is unprecedented. The rates on 10-year treasury notes dropped from 4.08% in October to 2.67% this month, a low that hasn’t been seen since the mid-1950s.
The rush for treasury bonds had already been in place by the time the Fed announced their plans to create still more money out of thin air and buy long-term debt from mortgage giants Fannie Mae and Freddie Mac. Federal Reserve Chairman Ben Bernanke hinted that the buyout plan might include Treasuries at some point; only time will tell.
Not everyone is jumping on the treasury bond bandwagon, however. According to Dan Seiver, a finance professor at San Diego State University, “The chances of achieving capital gains from buying long-term bonds right now are extremely low.” Seiver bases his stance on the forecasted rate of inflation over the next 30 years, which will likely leave investors with little to no return, once taxes are factored in.
The question of the day is, how long can this bond market last? How long can a government go on printing money out of thin air, essentially destroying its currency over time, and buying their own debt without catastrophic consequences? And if this plan is fail-proof, why aren’t more countries doing it?
You can bet that foreign investors have no intention of sitting idly by as the U.S. government slowly destroys its currency, while at the same time trying to drive the prices higher. No, foreign investors will be quick to jump ship in favor of safer investment options.
The moral is this: If you find yourself tempted to put your money into long-term U.S. treasury bonds, you may want to think twice before you jump. We have many more Investing Help Articles Now Available.