Why US Treasury Notes Will Eventually Yield Nothing

Wednesday, August 25, 2010
By Paul Martin

By: Barry M Ferguson
Market Oracle
Aug 24, 2010

For all investors seeking income, I have some bad news for you. US Treasury notes and bonds will eventually yield nothing. That’s right, I said it. “Zero percent interest coupons”. Many pundits would argue the opposite. And yes, the argument for higher interest coupons in the future is valid and sound. The US is currently following a strategy of debt destruction such that as I write, the nation is closing in on $13.5 trillion in debt. To see the number is quite startling. It is: $13,500,000,000,000.00. Mercy! The number is so large, most calculators can’t account for all the numeric placeholders. The number is so large, we now round up by hundred billions. The number is so large, the late astronomer, Carl Sagan, referred to really large numbers as “billions and billions”.

The good news is that there appears to be a limit. Zimbabwe wrote the book on trying to print their way out of economic dysfunction and eventually stopped printing with a z$100 trillion bill. As we all know, a printing press that never stops promotes inflation that eventually makes the printing press irrelevant. Not long after the introduction of the z$100 trillion, Zimbabwe thought about introducing the z$1 quadrillion bill. But, I suppose they reconsidered due to the idea that it would take too long to make change at the McDonald’s drive thru. Actually, by the time they got through destroying their economy, a z$1 quadrillion bill would not even buy a Big Mac! Have we not learned anything!

Actually, we have. When I say ‘we’, I mean our very own US government – the Federal Reserve. They have learned how to manipulate. Any party that issues a massive amount of debt, and continues to do so month after month, should logically expect to pay higher interest rates. One, the issuer is constantly increasing supply and diluting value and two, lenders eventually become suspicious that indebtedness leads to bankruptcy which leads to default. Point well taken. However, this is the new era. Here is what I think will happen to Treasury yields.

Debt is borrowed money and there are two factors at play in the process. One, the borrowed money has to be repaid. Two, lenders, or buyers of the debt, are typically not willing to lend money for free. They want an interest coupon that is commensurate with the risk of the return of principal.

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