Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.
My guess is the banks are parking the TARP money in short term treasuries – and that has pushed the yield to zero.
If I knew for a fact that this was true, I would be rolling around on the floor laughing. Just think about it, the government borrows a whole lot of money to bail out the banks and what do the banks do? They loan it back to the government.
A lot of people are going to use this as proof that we are in a deflationary spiral. But I would bet dollars to dimes that this is not the case. I expect the price of treasuries to drop as fast the price of oil did.
Think about it. A lot of oil producers are going to have to start selling off their reserves to maintain themselves in the style to which they have become accustomed. Russia has already started to do this. I expect that China will have to slow down on the purchases of treasuries if not halt them completely within the next six months. These factors combined will cause interest rates on treasury bills to shoot up.
Then the fun will really start. But on the bright side, I don’t think people will be worried about deflation anymore.