Side-effects: Why US treasury bond may soar

Credit crunch side-effects:
Why US treasury bond may soar

Back in 1995-1997, Bulgarian banking system were broken, and Bulgaria experienced very high inflation (~1000%+).

All banks gived huge interests on the BGL, and "normal" to "high" interests on USD and DEM.

One bank however, gived zero interest on DEM and USD, and they said - "with us your money are safe, you will receive no interest, but your money will be here when you needed".

I do not remember what this bank was and if they existing today.

Today we may see same parallel with US and Bulgarian banking system:

  • US bank system is broken - fact.
  • US banks try to give customers all kind of "goodies" - For example WaMu give away "free account for live".
  • US deposits are insured up to 100,000.00 USD - fact.
  • US inflation raise. Even official CPI is more than bond yield. This means
  • US bonds now give you ***NEGATIVE*** interest - fact. This could change in future, but today it is proven fact.

Now the question is:
In such situation who, except China, Arab countries and Russia may want to lose money by buying US government bonds?

However we do not see bond colapse. Nobody selling bonds. At least not at high rate.

The chart show clearly, that for last 5 years, the bonds are... flat. If we exclude the fall last mo, the volume is rising, but not that much.

I believe what is behind the raise in the bond is ... broken US banking system. People and busineses are scared to death. They do not trust their banks, and whoever have more than $100,000 already splitting them into different banks, $100,000 in each.

However what you will do if you have $500,000, $1,000,000 or more and you want or need to stay in cash? You can't really split betwen 10-20 banks.

You buy 3 or 6 month US treasury bonds.

Is liquid, is safe, is ***FULLY*** insured and covered. Buying bonds in this case is much safer than stocks or gold, because you do not know if stocks / gold will go up or down (may be stock will be down on the day you need the money).

So conclusion is people and busineses do not buy those bonds to earn interest. They don't care about the yield. They do that for safety reasons, because they do not trust the banks.

Related links:

UPDATE 22.SEP.2008:
I replaced US Bank Corp chart with ISHARES LEHMAN 20 YR, because I believe it is better visible that bonds rising.

© 20.AUG.2008,
Nikolay Mihaylov, nmmm@nmmm.nu
First published @ nmmmnu.blogspot.com

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