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TMFPostOfTheDay (< 20)

Are Treasuries Really Safer than Cash?



October 26, 2011 – Comments (3)

Board: Macro Economics

Author: notehound

A self-reinforcing deflationary spiral is the second greatest fear of the Fed, second only to a run on the Fed member banks.

As the Fed has explained, zero interest rate policies - ZIRP - (or financial repression in the words of Mohamed El-Erian) are utilized as a tool to counteract deflationary forces.

In a deflationary environment, cash increases in value.

Despite the deflationary fears of the Fed, existing acknowledged inflation figures indicate modest positive inflation (more if food and gas are included). If we have inflation at all, then real Treasury yields are actually negative across virtually the entire yield curve.

If existing acknowledged inflation figures are believed, then holding a straight cash position actually provides greater investment return than holding Treasury bonds. Nonetheless, investors keep trading cash for Treasury Bonds.

This may mean one of the following two things:

Treasury bond purchasers do not believe published positive inflation numbers and rather seem to think we actually are locked in a deflationary spiral (with increasing cash purchasing value) that is likely to continue for the life of their bonds - up to 30 years.


Treasury bond purchasers don't believe there are any banks where their cash would be safe - and - they convert their cash into Treasuries because they are more concerned about receiving a return of their nominal principal than they are about receiving a return on their principal.

I can't think of many other explanations as to why investors keep piling into Treasuries at negative real yields - especially at a time when the US is borrowing tremendous amounts and Europe is likely to be borrowing more as well.

It sure looks like the laws of supply and demand don't apply to the sovereign debt market - since supply is increasing. That is, unless the demand is increasing at a greater rate than supply is increasing.

3 Comments – Post Your Own

#1) On October 26, 2011 at 12:46 PM, ikkyu2 (99.29) wrote:

Post of the day?  Really?  I mean, some words were cobbled together - I guess people aren't using the boards much any more if this is the best we could find.

See, if you are going to compare cash yields (0%) to Treasury yields (0.2% or thereabouts), well, that's a comparison.

If you are then going to adjust treasury yields for inflation or deflation, and you want to continue to compare to cash, you must also adjust the cash yield for inflation or deflation.  Otherwise what's the purpose of the comparison?  When that is done - if you use the same adjustment factor for cash and for T yields, and you should - you will find out that adjusted T yields are still marginally higher than adjusted cash yields.

The error here isn't even math.  It's an error that would have been corrected in Thinking 101, which I believe is taught in fifth grade or thereabouts.  I suggest the post author head back to school.

As far as the explanation for what the poster has observed - that Treasuries keep selling out at auction at these negative real yields - it is certainly worth being aware that the Federal Reserve is buying most of these bonds, maybe all of them.  

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#2) On October 26, 2011 at 12:49 PM, SUPERMANSTOCKS (59.71) wrote:


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#3) On October 26, 2011 at 1:27 PM, russiangambit (29.16) wrote:

I would say the current treasury yield is not enough to pay for the risk of  possible increase in interest rates.

Of course, that risk might be 5-10 years out in the future but it is there.

So, cash is safer. Unless you are bank that needs to pay for FDIC insuarance on deposits and therefore needs the extra 0.00000   % to cover the speread. ) 


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