Imagine paying the United States government to hold your money for three months. The condition appears to turn investment theory on its head, but that's what investors are doing in today's uncertain, risk-averse markets.
Foreign investors are accumulating Treasuries at the fastest pace since 1988, up 12% since September, Bloomberg News reported Monday, citing U.S. Federal Reserve data. They are becoming institutional investors' mattress. The tactic is driving Treasury rates to record lows: the 2-year note has fallen to 0.76% from 3.11% on June 13, while the 3-month Treasury turned negative on December 9 for the first time.
Meanwhile, the 10-year and 30-year Treasuries have fallen to 2.55% and 3.04%, respectively -- not much return on your investment, but that's beside the point: investors currently are more concerned about the return of their investment than the return on their investment.
Still, economist David H. Wang said there's an upside and a downside to the lower interest rates for Treasuries.
"On the one hand, the lower interest rates substantially decrease the U.S. government's borrowing costs, so the taxpayer will benefit there," Wang said. "Rates have fallen even as the national debt is likely to rise above $11 trillion, and as this year's deficit trends toward $800 billion, perhaps $1 trillion. We could not fund this deficit in 'normal' times, as the interest costs would be prohibitive."
"On the other hand, Treasury rates this low reflect widespread investor fear about U.S. and global economic conditions," Wang said. "People are happy to park their money with the U.S. Treasury because they believe there's little chance of finding a productive investment in the year ahead. That's a decidedly bearish sign for commerce for 2009."
Economic Analysis: In today's market, the Treasury investment is king. When will the flight-to-safety and super-low Treasury interest rates end? Wang says when the global and U.S. economies show signs of growth. His earliest recovery date? Early Q3 2009.
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