TBT

Thanks for your good comments on yesterday’s column. I hope to post some of them soon.But today . . .

The yields on Treasury securities are remarkably low. As you can see here, the 3-month T-bills yield essentially zero, and even the 3-year notes yield less than 1%.

So the first thing I would say is: don’t buy them. You’d do better in an FDIC-insured certificate of deposit at your bank.

The second thing to say is that these low yields are not only unattractive, they testify to the fear in the global marketplace. Investors are fleeing to safety, willing to accept almost any pittance in exchange for the preservation of their capital. They are buying 30-year US Treasury bonds at a price that yields just 2.6%.

The third thing to say is that this is a rotten way to try to preserve capital – especially as regards the long-term bonds.

Right now, they have bid up the same bond that fetched just $1,000 in May . . . paying $45 a year interest and thus yielding 4.5% . . . to $1,380 and the aforenoted 2.6% yield to maturity.

If inflation kicks in at some point, and/or interest rates rise to more normal levels, investors might once again decided $1,000 is a fair price. Oops. And if interest rates rose to 9%, the bonds would trade around $800. (In 1979, at their peak in the aftermath of the post-Vietnam inflation, the rate reached 15%.)

The fourth the thing to say is . . . why would anyone accept a 1.43% yield from a regular Treasury note when they can get virtually the same rate from the 5-year TIPS, which is adjusted up for inflation, should we have it?

A month ago I suggested 5-year TIPS selling around $930 each – and noted that the long-term TIPS, quoted to yield more than 3%, seemed worth considering.

Last night, the 5-years were a tad higher. And the quote on the long-term TIPS had risen 25%, bringing the yield-to-maturity back down under 2%.

So the 5-year TIPS remain an ultra-safe (if uninspiring) place for money. But the chance for a one-month 25% gain on the long-term TIPS has now passed. (If you bought some, you might even take that profit and reinvest in the 5-year TIPS.)

(Note also the discussion of I-Bonds.)

But what I’m leading around to is that the perceived safety of long-term Treasuries, especially those not adjusted for inflation . . . and the crazy prices they fetch . . . may be little more justified than the perceived safety, once upon a time, of California home prices, which everyone knew could never suffer more than the most fleeting of minor corrections.

Yes, it’s possible that long-term rates will stay low for a very long-time, as they did in the Great Depression and as they did/have in Japan. That seems to be what the market is telling us.

But if they don’t, and if inflation ever came roaring back as a consequence of our giant deficits and money-printing and the falling value of the dollar, you could get killed owning long-term Treasuries.

Which is why I bought a little TBT at $36-and-change yesterday, an exchange-traded fund that aims to rise twice as fast as the price of the 20-year Treasury falls (if it falls) or and vice versa.

It was probably dumb, because this is a bet that I know more about where the price of the 20-year Treasury is going than the market does. But as long-time readers of this column know, that has never stopped me before.