And Now For Something Completely Different: Negative Bond Yields

Treasury Inflation Protected Securities, or "TIPs", as they are popularly called, are U.S. Treasury Bonds that have a built-in mechanism to adjust returns for increases in the Consumer Price Index (CPI).  For a more detailed explanation on how they work, click here: http://markostake.blogspot.com/2009/12/tips-on-grabbing-higher-yields.html.

Yesterday, the U.S. Treasury sold $10 billion worth of TIPs which had a NEGATIVE cash yield of 55 basis points, or -.55%, with a 50 year maturity.  Huh?  How can yields be negative?  Does that mean that investors are so stupid that they would pay to lend money?  No, the adjustment feature as described in the piece linked above, adds to total return.  But, if the CPI were to come in at zero, then yes, investors would actually pay Uncle Sam for the privilege of lending him money.

Historically, cash yields on TIPs have tended to be in the positive 1-2% range.  Not today! 

So, what does this mean?  Investors are so worried about inflation eating away at their cash yields, that they will pay handsomely for inflation protection. 

What inflation?  Latest figures for the CPI have come in at a scant 1.1%.  That means that the total expected return for a TIP would be a positve .55% (the 1.1% inflation rate less the .55% negative cash yield).  Before you howl, keep in mind that the adjustment feature means that TIPs have the risk of  6 month Treasury Bills, which yield something on the order of .25%.  By comparison, a decent deal.

So, other than the fat half-percent yield, why should anyone buy these?  Simple, hyper-inflation is not only likely, it is inevitable.  Proof?  A falling dollar, an accelerating commodities market and most significant of all, the now snorting bull market in precious metals.  Oh, and let's not forget that none other than "Helicopter" Ben Bernanke's belief that inflation is TOO LOW! 

The only reason we have NOT yet seen the explosion in inflation is something called monetary velocity.  For a fuller explanation of this aspect of money supply, click here:  http://markostake.blogspot.com/2010/08/unusual-uncertainty-meets-qe2.html.

For investors, all roads lead to Gold, Silver and precious metals stocks.  While it appears that we are in the midst of a sharp correction, this will only be a minor bump on the road to MUCH higher prices.  For a review on where we are in the "Mother Of All Bull Markets", click here:  http://markostake.blogspot.com/2010/10/correct-me-if-im-wrong.html. 

The Federal Reserve, entrusted with controlling inflation, is actually the engine of inflation.  For a more thorough explanation of the Fed, as it is known to its friends, check out this video as to how it is supposed to work, versus how it has actually fared:  http://www.youtube.com/markostaketv#p/u/5/JiGA8XeZbUo.

With friends like these.....

Marko's Take