So Friday the 4th of
May, U.S. Treasuries rallied again.
Investors heard that payrolls rose a very small amount (~115,000) while
expectations were 50% higher. This meant
that panic ensued in the markets and investors took the “risk-off” response and
accordingly ran into U.S., German and Japanese government bonds.
Now think about this, U.S. Treasury
yields are below the Federal Reserves stated inflation target of 2%. Think of inflation merely as another way of
saying “U.S. dollar debasement”. This
means that real yields are negative where real yield is the return after
inflation. As of this writing, 2-year
note yields 0.26%, 5-year note yields are 0.78% and 30-year yields are 3.07%. But, and here is the kicker, this is not just
an American phenomena. German bond (the
“Bund”) 10-year yields set a record low hitting 1.58% and Japanese bonds
10-year yield is a lowly 0.89% as pension funds, hedge funds, mutual funds and
plain old mom and pop funds bought those too.
Remember that bond yields move
inversely to price so that if their yields are hitting lows, the prices of the
bonds are rising due to this demand. So, considering the U.S. debt and annual
budget deficit sizes, along with Japanese massive government debt, along with the
German situation of the Eurozone, these strong demands for sovereign debt are a
testament for really how lousy things are.
Nobody is buying these bonds for their yield, they’re making purchases
of government debt in spite of it. They
buy them simply for wealth preservation because they’re scared wherever else
they put their money it’s going to lose value (i.e. read, “considerable value”). This means they’ll take negative returns on
their money because at a minimum they’ll get back their principle, though they
lose the time value of their money.
They’ll do this because they’ll take a “guarantee” of a small loss over
the uncertainty associated with large losses.
Even if it’s costly in real terms, they trust that the U.S, German and
Japanese governments will not default. Now
that’s a scary outcome!
