US TREASURY BONDS: BEST PLACE TO HIDE
financial uncertainty, as the world is currently experiencing, US Treasury bonds are considered the safest refuge for money. Gold has long since lost that status. For many people it seems incredible that US Treasury bonds – which are nothing but debentures (IOUs) issued by the United States government – can be the safest investment. After all, it’s precisely the exorbitant spending by both individuals and that country, plus their extremely high debt levels, that brought on the current credit crisis.
To try to save the world from a financial crisis, the US Treasury is printing trillions of new bonds and unloading them on to the market. All traces of financial discipline by the US’s fiscus and central bank have evaporated. The abundant, overwhelming, supply of US dollars must – if the rules of supply and demand still operate – make US interest rates increase, the dollar weaken and inflation start running away. That’s what’s happening in Zimbabwe.
But don’t believe it. In the midst of the financial crisis caused by its own Wall Street, the US dollar is currently one of the world’s strongest currencies and the interest rate on 90-day US Treasury bonds has now dropped to almost zero (see table).
It makes no sense. Yet the US Treasury bond is currently the safest place to store your money. That shows how little confidence investors – let’s rather call them owners of money, such as oil-rich Arabs – have in other assets like gold, metals, currencies, governments and shares.
The table shows the US Treasury – government – can now borrow money, even for a fixed period of five years, for as little as 2,19%/year. With that cheap money it can buy US bank shares. Think carefully about that. If the price increase of bank shares, along with the dividends they declare, is more than 2,25%/year over the next five years, the US Treasury will make money out of its current lifeboat action.
It sounds almost impossible that should be the case. Nevertheless, some of the sovereign wealth funds of rich Arab countries recently indicated they were not yet in favour of making new investments in US bank shares. Treasury bonds with an interest return of 0,06%/year are safer.