Negative Yields are Not Crazy
How much would you pay to lend money to the government? Most of us have this arrogant idea that the government should pay us to borrow our money. And yet, last week a Treasury auction of $10 billion in 5-year bonds resulted in a price that will yield negative 0.55% to their new owners.
It is not quite as crazy as it sounds. These are Treasury Inflation Protected Securities (or TIPS) that will yield inflation plus some stated interest rate. So these bonds are set to return to their owners inflation minus 0.55% over five years. Given that normal unprotected five year bonds are currently paying only 1.18%, this implies a five year average inflation rate of 1.73%.
Annual inflation over the past five years has averaged 1.83% and over the past twenty five it has been 2.82%. If you think inflation over the next five years will be higher than 1.73%, then the TIPS, negative interest and all, are a better bet than the regular Treasurys.
So it is not crazy after all.
Investing, Media | Frank Curmudgeon | 
November 1, 2010 12:59 pm | 
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