Treasury Bond Bubble

Readers Question Hello. Can you tell me why anybody would buy US treasuries now with little to no yield when you can just park your money in an FDIC money market account or CD and get more? Surely with FDIC insurance coming from the same place as the implied guarantee of US treasuries money markets are a much better place to be, correct? This is a treasury bubble without a doubt yes?

Recently, there has been a strong demand for US Treasury yields. The increased demand has pushed up their price and therefore reduced their yields.

The 10-year note’s yield is currently 2.52 percent (earlier this year they reached 4.27%). The five-year note yield is 1.53 percent.

The rate on the one-month bill was 0.01 percent and the three-month will rate was 0.04 percent.

The main reason for the increased demand for Treasury bills is that they are seen as a safe investment. Investors are worried about any private sector investment (collapse of Lehman Brothers e.t.c). Therefore, the low yield on treasury bonds is seen as a premium for the greater security of the investment.

If confidence in private sector investments increased, we would see a shift from treasury bills to private sector causing lower price of bonds.

Alternatively, if people started to lose confidence in Treasury bills, because they feared the US government may default or partly default on debt repayment through creating inflation then there price could fall as well.

US Treasury yield on 30 year bond falls to record low at Bloomberg

By on December 16th, 2008

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