- As investors take refuge in an economy shaken by the coronavirus, US Treasury yields now have negative rates.
- As a result, the US financial markets have just cast a terrifying vote of “no confidence” in the future of the US economy.
- Markets have crowded out yield considerably as many investors flock to the safety of US Treasuries. It will not end well.
In a bewildering sign of future economic danger, the purchase of US government debt is now yielding negative rates. Yields on one- and three-month US Treasury bonds fell below zero on Wednesday. This is another worrying first for the US financial markets as a result of the coronavirus.
America, the world’s economic superpower since the Second World War, now has negative rates on treasury bills like the euro zone and Japan.
It’s not just the damage from the coronaviruses that brought us here. It was massive system-wide risk taking that put America in a weak position to absorb such a crisis.
After the 2008 subprime mortgage crash led to a financial crisis, it caused a global credit crisis. The result was a painful Great Recession. The financial authorities responded with a demonstration of “financial stability” programs to implement a “macro-prudence” policy.
But the only real macroprudential measure that could have saved America from much of the economic tribulation to come would have been to gradually tighten the money supply as the economy recovered. Instead, Washington continued to issue treasury bills to pay off the massive budget deficits caused by the excess of tax revenue.
Meanwhile, the Federal Reserve continued to increase the money supply, inflating a “bubble of everything” of colossal debt at all levels of the economy.
How can Treasury bill yields be negative?
How can a bond have a negative return?
Kim Rupert, Managing Director of Global Fixed Income Securities at Action Economics, said:
[Treasury bonds are] obviously the most liquid instrument. We saw a lot of selling pressure a few days ago when everyone was selling everything to get money. But with all the plans the Fed has introduced, the invoice market is much safer.
Treasury bonds are surely liquid. The Federal Reserve has been pulling them out by the tens of billions per month since last September. After all, the central bank has an unlimited supply of cash to buy them. And it became “QE unlimited”.
The Fed Can’t Save You Now
Just like in the old Depression Era Parker Brothers board game, “Monopoly”, the bank never runs out of money. This is one of the most important rules of the game:
The Bank never goes bankrupt. To continue playing, use pieces of paper to keep track of each player’s banking transactions – until the bank has enough paper money to work again. The banker can also issue new money on plain paper slips.
But even this functionally infinite liquidity is not enough to stimulate yields on treasury bills in the current market.
The Federal Reserve will have to help the US Treasury issue much more to pay for the $ 2 trillion stimulus package that Congress has just adopted. And the demand from investors for safe, losing money and negative yield bonds is insatiable.
Consider what this means for the future of the American economy. Rather than buying stocks at a heavy discount, they stack up at negative-rate Treasury bills. This means they think they will get their money back, or even make a profit by selling it to the next investor.
This means that the financial markets have just issued a terrifying and somber vote of confidence in the American economy. We are faced with a recession to come unlike any living American has seen in their lives.
Disclaimer: This article represents the opinion of the author and should not be considered as an investment or commercial advice from CCN.com.
This article was edited by Sam Bourgi.
Last modified: March 25, 2020 5:12 PM UTC