Paying Up for Safety May 6, 2011March 24, 2017 Geez, you take two rotten snow days and the biotechs tank; your dredging stock gets a nice plug here and it tanks (so, too, your paper stock); gold – as if to mock your pre-snow column – tanks; the Canadian dollar, in which you have some of your cash, tanks. The Dow tanks. Where is all this money going? If people are selling all these things, they have to be putting the proceeds somewhere. One guess: U.S. Treasuries. Have you seen these things? The three-month Treasury bill was yielding an annualized one-hundredth of one percent interest yesterday. Whoop-de-doo. The three-year note promised not even 0.95% a year. The five-year note, 1.88%. Clearly, no one is expecting inflation, or they’d never accept rates so low. The five-year Treasury Inflation Protected Security (TIPS) maturing April 15, 2016, which promises to pay one-eighth of one percent a year above inflation (and Uncle Sam’s perhaps conservative calculation of inflation, at that), was selling yesterday at nearly 103 cents on the dollar, which works out to a yield of minus .47 percent a year. Clearly, everyone is expecting inflation, or they’d never accept a negative interest rate. So . . . which is it, kids? Inflation? No inflation? I suppose the folks who think inflation looms are chasing the five-year TIPS, while those who see us following the Japanese model (loads of National Debt but decades of near-zero interest rates) are chasing the standard five-year bond. They can’t both be right – at least not both at the same time. (One could be right for a while and then the other.) Much as I laud recently-issued TIPS as both a deflation hedge and an inflation hedge,* I sold my own short-term TIPS yesterday. And if I owned any standard Treasuries, I would have sold them, too. Both the inflation-fearers and the deflation fearers may be overpaying in their flight to safety. One thing neither set of folks seems the least bit concerned about is the creditworthiness of the United States of America. The market is assuming we will not default on our Treasuries. Which is why all hell would break loose if we did. *They will pay off $1,000 even if the prices of everything have collapsed; they will pay off $3,000 if the prices of everything else have tripled.