Are Treasuries Really Safer than Cash?
Board: Macro Economics
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.