Investors bought inflation-protected Treasury securities at a negative interest rate for the first time on Thursday, demonstrating the depth of concerns that Federal Reserve efforts to stimulate the economy could lead to higher inflation in the future.
The $15 billion in Treasury inflation protected securities, or Tips, were sold at a negative yield of about 0.046 per cent. Investors could still make money on their holdings because the principal of such securities increases if inflation rises.
Bill O'Donnell, strategist at RBS Securities, said that investors were accepting "a short-term cost for a potential long-term gain." Treasury securities of all kinds are finding favour as a haven as investors flee the market turmoil in the eurozone.
Investors are turning to Tips as the real returns on fixed-rate Treasuries also have turned negative, meaning the yields are less than the current rate of inflation.
Investors are buying 10-year Treasury notes with a yield of 1.99 per cent. Meanwhile, consumer price data released on Thursday showed that US core inflation, which excludes food and energy, for the year ending in December, advanced 2.2 per cent, its fastest pace of growth in four years. The consumer price index was flat for the second successive month.
The low yields on Treasury securities reflect the impact of Federal Reserve's Operation Twist programme, under which it buys longer-dated bonds, with the hope of pushing down long-term interest rates and thereby stimulating economic growth. US jobless claims dropped by 50,000 to 352,000 in the week ending January 14, the lowest level since April 2008, the Labour Department said.
"The big gorilla in the room is the Fed," Mr O'Donnell said. "They are buying up a lot of debt."
I know I'm seeing the world with gold and silver colored glasses, but seems to me there is a "more solid" vehicle for preserving and protecting wealth in these circumstances.