We are in for a world of inflation with the fed's printing press running for BO's fiscal stimulus. How can we NOT have inflation, i get the flight to quality idea and T-Bills being a safe investment, but < 3% 30yr yield is crazy, either that or we are in for a world collapse if these prices are true. thoughts?
Isn't the 2.6 million jobs lost (officially, who knows how many are actually out of work) in the US alone pretty deflationary? Or the destruction of 401k's and housing values? I agree the govt is trying its best to re-inflate but IMO there are huge demographic overhangs to contend with and a self-reinforcing cycle that is beginning to take hold. If they are successful I think one of the first canaries in the coal mine will be the 30yr bond as holders scramble to get out. The real inflation would not hit until after that.
Bills, bonds, you know what he meant. As to the question, for now, there is no inflation, but rather deflation. The Fed does have mechanisms for soaking up liquidity if inflation rears it's head, although I suspect that they ultimately want inflation and a weaker currency. I agree, there is no way that I would fork over my money to the US government for 30 years with >3% rates (or at least with the intention of holding for 30). For now though, there are buyers.
If the dollar holds up and gold doesn't skyrocket I guess the Fed can print as much as they want. When you see gold moving up and the dollar moving down then you know it is only a matter of time before bonds absolutely crater.
Which will occur first? A rally back up to ~142 or a collapse down to ~123. The latter would be "better".
forecasts.org/30yrT.htm 30 Year U.S. Treasury Bond Yield Forecast 30 Year Maturity Secondary Market Rate. Percent Average of Month. Month Date Forecast Value 50% Correct +/- 80% Correct +/- 0 Nov 2008 4.000 0.00 0.00 1 Dec 2008 3.12 0.45 0.75 2 Jan 2009 3.15 0.56 0.92 3 Feb 2009 3.29 0.63 1.04 4 Mar 2009 3.40 0.68 1.13 5 Apr 2009 3.77 0.73 1.21 6 May 2009 4.08 0.77 1.28 7 Jun 2009 4.26 0.81 1.34 8 Jul 2009 4.44 0.84 1.39 Updated Saturday, December 13, 2008
If you give me $1m and I promise you to pay you 3% annually over the next 30 years that might sound a good deal if inflation is 0% over the ENTIRE time frame. If inflation goes to 5% somewhere in the 30 years you're getting the short end of the stick as you only earn 3%, i.e. in real terms you receive a negative coupon.
The 30 year treasuries are the most liquid instrument in the world. You can sell at any time with any size without a problem. The buyers of these are not holding to maturity, they're just riding along with the quantitative easing policy, or just parking cash in a safe instrument until the storm blows over. There's no problem holding them for 6 months if inflation is close to negative. You get 3% risk free. While the yield won't stay this low forever, it's a relatively safe investment if you have billions of dollars that need to be parked.