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Old 04-30-2012, 08:10 AM   #1
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Why do people by U.S. treasury bonds?

I had a facinating talk with a few Europeans this past week. One of the topics that came up was why people still buy U.S. treasury bonds despite their low returns and vulnerability to inflation. Essentially, they told me that people in other countries view the U.S. and arrogent and prideful. The common view seems to be that the U.S. would never default on thier loans out of pride. While they did admit there is an inflation risk associated with this bonds, the extremely low default risk (in their minds) made the U.S. treasury bonds attractive.

Essentially when they build a portfolio they add in the treasury bonds to lower the overall variance of the portfolio in exchange for the lowered returns.

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Old 04-30-2012, 08:14 AM   #2
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Well "people" don't buy very many. Institutions do. They cost nothing when you can borrow from the fed at .25% and buy bonds that pay more - and then (re-hypothecate)use those bonds for collateral for even more leverage - wash, rinse, repeat.
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Old 04-30-2012, 08:16 AM   #3
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The perception that we will never default on our bonds is just that; perception.

With a stated goal of no less than 2% inflation, they are anouncing to the world that if you buy our bonds, you will lose money. They are promising to take your cash and give you back dollars at some future date that are guaranteed to be worth less than those used to buy the "safe" bonds.
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Old 04-30-2012, 08:22 AM   #4
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