Weird yields for Treasuries evidence of investor angst

Here is an investment proposition: Send the government a check to invest in a U.S. Treasury bill with a guarantee that in
three months you will get back less than you invested. This absurdity actually took place this month, when at one point Treasury
investors were accepting a negative interest rate.

As The Wall Street Journal put it, "Investors were willing to pay $100, knowing
they would get $99.99 in return, in the belief
that a small but guaranteed loss was preferable to investing in stocks, corporate bonds, or other securities." One can
see
this event causing angst for the curators of Will Rogers’ well-worn counsel on safe investing: "I’m not as concerned
about
the return ‘on’ my money, as I am the return ‘of’ my money."

A large number of investors are so fearful these days that they have flocked to the safest securities, pushing down interest
rates to virtually nothing. A recent government auction of four-week Treasury bills sold $30 billion of the securities at
a yield of zero — exactly 0.00 percent — and amazingly the demand for this offering was so strong that the nation
could have sold
four times that amount. Just for perspective, back in January 2007, a four-week Treasury bill yielded 5.175 percent.

"Why anyone would give money to the United States government for 30 years at 3 or 4 percent is beyond comprehension.
It’s
clearly a bubble," snorts noted investor Jim Rogers, chairman of Rogers Holdings in Singapore. (Thirty-year Treasury
bonds
currently yield a bit over 3 percent.)

How does one explain such irrational behavior? For one, it is the "institutional imperative" phenomenon, whereby
in such a
bad year, institutional managers want to be able to show on their year-end reports to constituents that they are taking "prudent"
measures to protect their funds in these difficult times. In addition, many investors are just scared and afraid to commit
their funds for any length of time.

For a picture of just how risk-averse investors have become, and how fractured the fixed-income markets are, look at the record
difference in yields that people are willing to accept. We have noted that short-term Treasury securities yield near zero,
and 30-year Treasury bonds yield slightly more than 3 percent. Contrast that with longer-term AA municipal bonds yielding
more than 6 percent tax-free. BBB-rated "investment grade" corporate bonds have yields above 10 percent, and in
the junk bond
category, BB-rated El Paso Corp. just issued a five-year bond with a 15.25-percent interest rate. These huge yield differences
between bonds of various qualities are unprecedented.

There is a clear paradox in buying Treasuries today. Investors are flocking to Treasuries — which are considered one
of the
safest places to put your money — yet buyers of these securities actually are investing in one of the riskier options
available
to them. They are behaving like dot-com investors who bought tech stocks in 1999 near the peak of market.

The return investors will earn on their Treasury securities is almost certain to lag the returns to be achieved in stocks
and "less safe" fixed-income securities over the coming years. Those who can see past the near-term uncertainties
and realize
they can purchase undervalued securities with dividend yields or interest payments far above those of Treasury securities
will be well rewarded.

___

Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management
firm. Views expressed are his
own. He can be reached at 818-7827 or [email protected]

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