U.S. Treasury sells bonds with a negative return rate

Marketplace Staff Oct 26, 2010
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U.S. Treasury sells bonds with a negative return rate

Marketplace Staff Oct 26, 2010
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TEXT OF INTERVIEW

JEREMY HOBSON: The U.S. Treasury Department is getting a great deal from investors. Yesterday, for the first time, it sold bonds that effectively have a negative rate of return. That is, investors paid the government for the opportunity to lend it money. Marketplace’s Nancy Marshall Genzer joins us now, live, from Washington with more. Good morning, Nancy.

NANCY MARSHALL GENZER: Good morning, Jeremy. Now Jeremy — I’m going to turn the tables and ask you a question this morning. Will you lend me a 100 bucks?

HOBSON: For you, Nancy, anything.

GENZER: Why thank you Jeremy. And will you also pay me $5 and 50 cents for the privilege of lending to me?

HOBSON: No I will not do that.

GENZER: Darn. It sounds like a rotten deal, but that’s exactly what investors are doing. Yesterday they bought a certain type of treasury bond that isn’t paying anything. In fact, right now it has a negative return as you just mentioned. That means investors paid a $105 and 50 cents for every $100 of these bonds the government sold.

HOBSON: Why on earth would an investor want to do something like that?

GENZER: It does sound crazy. But, if inflation goes up, it could be a pretty good deal. That’s because the value of these inflation protected bonds goes up with inflation. Now, some economists have actually been worrying about something called deflation. That is, where the economy is stagnant. No one will buy anything because they think prices will just keep falling.

HOBSON: So does this mean deflation is no longer a concern?

GENZER: Well, we’re not sure about that yet. But these investors think inflation is a really safe bet. For one thing, the Federal Reserve has hinted that it’s going to pump even more money into the financial system. That would probably increase the inflation rate, which is really low right now. And Jeremy – you can just wire that hundred bucks to my account.

HOBSON: Do people still wire? Alright, thanks, Nancy.

GENZER: You’re welcome.

HOBSON: Nancy Marshall Genzer in Washington.

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