[mjkst27]

The yield on various US Treasury instruments is commonly referred to in financial circles as the "risk-free" rate of return for asset classes of similar time duration. This is because the US Government (via the Fed, which is technically not part of the government, but can be assumed as such for sake of this discussion) can always, as long as it still exists, print the dollars required to service the debt. Barring a cataclysmic event of biblical proportions, the Govt will be right there to pay the interest due to holders of its debt obligations.

But wait a second. That means there really is NO RISK associated with these bonds. They will pay me "dollars" as specified, no matter what.

But don't we live in a capitalist economy?

Doesn't that mean that wealth can only be earned by truly investing, i.e. taking a risk?

Buying Treasuries entails no risk, so how can it pay any return at all?

Ah, the magic of Fractional Reserve Banking. See Hypertiger, et al

My point here is this.....why wouldn't "investors" buy UST's right down to zero yield in the economic environment that we stoolies "know" is up ahead of us? Why wouldn't you buy an instrument that has NO RISK, but does have measurable reward? (notwithstanding arguments regarding the value of a dollar)

Or said another way, why would any existing holder sell his UST's in this environment? Why give away something that is riskless but pays something in return for its holder taking no risk?

Is it all about the perceived value of a dollar? While I agree the dollar may go down significantly in value against foreign currencies, I think it will be a long time before J6P abandons the dollar for domestic transaction value.

This inflation/deflation thing is a doozy

[mjkst27]

As an aside, shouldn't any freshman economics student laugh out loud when informed of the following two "facts":

1.) We live in a capitalist economic regime
2.) US Treasury debt is "risk free"

Are these not incompatible?

[Goldilocks]

'Real rates of return' are the key. Such US rates are already negative. Swiss are negative. Euroland has about 100 basis points to play with. Japanese, well, I don't know but I assume they are negative. Their people sure seem to buying Gold.

When the monetary rate of inflation is higher than the rate given by bonds smart money will buy something else. Like Gold - Absolutely no risk there in the long run.

When the 'measured' or 'official' rate of inflation is higher than Bond rates why hold bonds? You are actually losing purchasing power. Go with something that historically protects against this like Gold instead.

We are at the point of recognition for the people beyond the 'smart money' cache.
This is why you have Greenie weenie once again telling us to jigger the already fraudulent inflation measures downward once more. To prevent people from swamping into real asset classes and causing hyperinflation in those commodities while consumers have no more money to spend and producers thus have very little price leverage.
It is the end game. It is in sight. It is looking one hell of a lot worse than I ever dreamed it would be 3 years ago.

Course, that's all just my take on it.

[machinehead]

"Risk-free" as applied to Treasury obligations means "free of credit risk" (i.e., default risk).

All fixed-income securities including Treasurys are subject to other kinds of risks, such as inflation, changing rates, reinvestment risk, etc.

TIPS (Treasury Inflation Protected Securities) probably come closest to a truly risk-free vehicle. But the CPI to which they are indexed is a flawed measure of inflation.

[mjkst27]

(I'm playing devil's advocate here)

Gold may be risk-free, but it's also reward-free (it pays no yield). It's price in fiat is free to go up or down.

Also, the money supply as judged by M3 has been growing at a rate that FAR exceeds Even the 30-year Treasury bond yield for a long time now, at least 10 years. (I'd have to do my homework on this, but it's beside the point of my exercise)

So, Mr. Market obviously doesn't give a hoot about true monetary inflation. He believes the CPI.

I am trying to understand why the market won't just buy Treasuries right down to zero yield, since they are already far below CPI for all time frames up to 2 years, and are purt near on the 5 year. Why not take this thing to its logical end, Mr. Market?

I don't know, just frustrated with the irrationality of it all.