If you look at information on the Treasury website, you will notice that currently, the real interest rate on the entire yield curve is negative.

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If you check the nominal rates in the short term, you can verify for the shorter period bills.

Thus, an interesting question for laypeople to learn from us on this site may be why this is the case? How can it be that investors are essentially paying the government to hold onto money for them?

  • $\begingroup$ Not to be flippant, but isn't this simply the price at which Treasury supply equals Treasury demand? And, since the supply is essentially fixed, this is probably because of a demand shock? We can tell stories about why that demand shock happened, but they probably are just just that -- stories. $\endgroup$ – BKay Mar 10 '20 at 19:13
  • $\begingroup$ @BKay Do you feel that there are no pieces of evidence one could point to in an answer that may explain the shock? I agree it is hard to suss out. $\endgroup$ – Kitsune Cavalry Mar 10 '20 at 20:23
  • $\begingroup$ What's an ideal answer here? Is it acceptable to point out forces that likely push down nominal and inflation rates? Or do you want an explanation that can be shown to clearly causally and quantitatively explain the changes? $\endgroup$ – BKay Mar 10 '20 at 20:56
  • $\begingroup$ The latter would be pretty hard to show since this yield curve is a recent phenomena. I think either would be okay as an answer. I intended this question to be about something a layperson would hear and ask about. $\endgroup$ – Kitsune Cavalry Mar 10 '20 at 21:04
  • $\begingroup$ If you do not want to lend to the US Government you could lend to companies or buy shares. Or you could lend €100 to the German government and choose between getting back €98 in two years time or €87 in 30 years time $\endgroup$ – Henry Mar 10 '20 at 22:13

Investors are not paying to hold Treasury bonds (yet), nominal yields are still positive (but that could change...). All that is happening is that inflation-protected securities are guaranteeing a return less than CPI inflation.

This is not that much of a mystery: there is no way to buy the CPI index (other than trading inflation derivatives). You can buy some goods, but you cannot lock in prices for services. As such, there is no guaranteed way to lock in the CPI inflation rate.

Investors try to make money trading bonds. As long as the nominal returns are greater than the nominal cost of holding positions - which is approximately equal to the policy rate - buying bonds is profitable. Current U.S. Treasury pricing is consistent with the belief that the Fed will cut rates.

The interesting question is why investors would hold bonds with negative nominal yields. The reasoning is more complex, but as we see in Japan and the euro area, they can be forced to do so - since holding large amounts of currency notes is not an option for institutional investors for security reasons.


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