Why I hope you didn

  • Record high prices for five year
  • What you would have been paid ten years

Yesterday I urged you to sell Treasuries. And my timing
couldn’t have been better. Just hours after I made my announcement, a

story shed more light on the Treasury market.

gained as the government’s $35 billion sale of five-year
notes drew the lowest yield since the government began quarterly
of the securities in 1976.”

I’ve bolded the above statement because what it means is
that five year Treasury note prices are at historic, all time highs. For
those readers unfamiliar with Treasuries: when the yield is low, the price is

The U.S. Treasury sells these securities at or very close to
par – that is, for 100 cents on the dollar. For the sake of this example,
let’s assume they’re selling at par.

Yesterday, new five year Treasuries only yielded 1.26%.
Treasury notes sell in increments of $100. So if you bought one of these
Treasuries yesterday, on September 28, 2015 you’ll get your $100, plus an
additional $1.26 every year. In other words, you have to spend $100 to get
$106.30 five years from now.

Never before have five year Treasury bonds cost so much, and
yielded so little.

Compare that yield
to what you would have received ten years ago, during the September
28th bond auction in the year 2000. Back then, five year
Treasuries yielded 5.9%. So, you would have paid $100 to get $129.50 in five

You’ll notice that the interest on these securities is not
compounded; you get the same rate every year relative to the par

I’ve argued before that Treasury bonds, notes and bills are
all in a huge bubble. Some people claim that Treasuries can’t be in a bubble,
because when you buy a Treasury, you’re guaranteed to receive your principle
investment back.

This argument completely discounts the likelihood of even
modest inflation nibbling away at your principle. After all, I don’t think
there are many people that would expect inflation to stay less than 1.26%
over the next five years. In the event of double digit inflation per annum on
average (like we experienced in the late 1970s) this five year bond could
lose nearly 40% of its value.

That looks suspiciously like a bubble brewing to me. And the
worse the inflation, the bigger the losses on this Treasury note. Yeah, you’d
get your principle back, but it would be worth much less than it was worth
five years prior.

So how did Treasuries get so expensive, and the yield so
low? The answer is demand. With high levels of uncertainty and fear in this
tumultuous stock market (as well as in currency markets and muni-bond
markets), bank failures and slowed growth in the United States, institutional
and individual investors alike are seeking safety and security. In this
environment paying $100 to get $6 five years from now sounds like a decent
plan – especially since the loan is guaranteed by the Government.

As far as I’m concerned, the words “guaranteed by the
Government” should raise red flags, not soothe investor nerves.

For the next five years, I’d rather have money in gold than
Treasuries. How about you?

Kevin McElroy


Resource Prospector

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