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Wow, What A Deal!

Zero Percent Treasuries are flying off the shelves.

Show an investor an investment that is guaranteed to make no money and, presumably, he won't be interested. Show another investor an investment that is guaranteed to lose money and surely he won't be interested. Oh, but for the strange times we live in …

Investors pounced at the opportunity to invest in both types of investments on December 9 when the U.S. Treasury held an auction of U.S. Government bonds. The auction attracted $60 billion, with $27 billion flowing into three month T-bills (returning a negative .005 percent) and the other $33 billion into four-week T-bills returning zero percent. (See below for in-depth analysis.)

According to the Federal Reserve, foreign central banks and other institutions are buying Treasuries at the fastest pace since 1988, boosting their holdings by 12 percent since September. Cheaper rates mean cheaper borrowing for the U.S., too. The Treasury Department reports that the amount of interest paid by the U.S. government on its $10.7 trillion outstanding debt fell by $10 billion in the months of October and November.

Fun hypothesis: If a client were to cash out of the S&P 500 (down 38.4 percent as of December 8, 2008), and invest in three-month T-bills, returning .0005 percent, it would take 2,396 years to make up the S&P's YTD loss (see graph above).

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