THE BIGGEST INVESTMENT BUBBLE TODAY may involve one of the safest asset classes: U.S. Treasuries. Yields have plunged to some of the lowest levels since the 1940s as investors, fearful of a sustained global economic downturn and potential deflation, have rushed to purchase government-issued debt.
The market also has been supported by comments from the Federal Reserve that it, too, may buy long-term Treasuries. – As a result, the benchmark 10-year Treasury note yields just 2.40%, down from 3.85% as recently as mid-November. The 30-year T-bond stands at 2.82%, and three-month Treasury bills were sold last week for a yield of just 0.05%. – Many investors argue it’s dangerous to buy Treasuries with such low yields.
A finance friend of mine explains succinctly:
and when inflation goes up, rates will go up.
Did you know that right now the us treasury 30 year, 4.5% yield, matures 5/15/2038 is trading at 128 (this is a yield of 3%). If that yield moves to, say, 6% (a more realistic yield), the price goes down to a shade over 79.
This means that 30 year yields going from 3% to 6% cause losses to investors of almost 40%. That, my friend, is a lot of money. After another trillion dollars of issuing, along with a few trillion out there already, that’s could easily be a trillion dollar loss for investors……….
I’m not sure what can be done about this, though eliminating capital gains taxes, deregulating bond markets, and going back on the gold standard would be a good start.