Last week, I saw a title that stopped me dead: Humble T-Bills are suddenly sexy. Yes, treasury bonds! Never have I – in over 15 years of covering business and economics – ever seen the words “sexy” and “Treasuries” in the same sentence.
And for good reason. In the investment world, treasuries would never be considered the sexiest. It would be tech stocks, crypto or maybe NFTs. Treasuries would be those who wear sensible shoes, drive under the speed limit and shop at Costco.
“I feel like everyone is thinking about this humble, boring world of Treasuries,” said Alexis Leondis, who wrote the mind-blowing headline and accompanying article for Bloomberg“And I’m like, ‘They’re not like that anymore. They deserve a second look.’ “Leondis isn’t wrong. Government bonds (AKA treasuries, treasuries, treasuries) have had a truly remarkable shine. Sensible shoes and all.”
One bond in particular, the Series I Savings Bond, has become so popular that potential buyers crashed on the Treasury website last week (TreasuryDirect.gov, where you can buy the bonds). What’s going on? What happened to government bonds to make them sexy?
Anatomy of a bond
A bond is essentially a loan. You lend the government, say, $100, and after the bond matures (in four weeks, six months, 10 years, etc., depending on the bond you’re buying), the government will pay you back, plus a little of interest.
US government bonds are considered one of the safest investments in the world, with virtually zero risk. Also, virtually no rewards. “Until recently, I thought ‘boring’ would be an absolutely accurate word to describe Treasuries,” Leondis said. “And for most people, it’s not really worth a look because the rates were so incredibly low. Like, less than 1%, kinda low.”
For 4-week bonds, in January the government was paying a yield (interest payment) of around 0.05%. This means that if you invested $100 in a four-week bond in January, at an annualized rate, you would get back $100.05. A nickel for your troubles.
Today, however, is a different story. Right now, the four-week bond is yielding almost 4%. Nearly 80 times the payout for investors.
Overall, government bonds offer investors the best yields they’ve seen in years: 4%, 5%, 6%. That’s way better than the return you’ll get in the stock market right now (the S&P 500 is down almost 20% so far this year), but still not enough to keep up with inflation.
The link that broke the internet
Which brings us to the nexus that broke the internet: the Series I Savings Bond. These are inflation-adjusted government bonds that pay an annualized interest rate of over 9, 6%. The deadline to lock in this rate was Friday, October 28 (after rates had fallen to around 6%): hence the website down.
TikTok, Instagram and YouTube have all been filled with financial advisors asking people to head to the Treasury website ASAP and buy the bonds.
NPR reporter Andrea Hsu and I decided to take this advice to heart. We were thinking of pooling our own money and moving on to breaking bail.
Series I savings bonds required a six-month commitment, so Andrea and I started smaller with the cheapest bond: a 4-week bond, which we split: $50 each. We tried logging into the Treasury website several times, only to encounter error message after error message. “I’m a little worried,” Andrea said after a few minutes.
“They got very hot…”
According to David Enna, who covers government bonds for Tipswatch.com, the TreasuryDirect website crashing and people fighting over bonds as if they were tickets to a Lizzo concert is very, very new. .
“These are things that normally never attract attention,” Enna explained. “Why is Treasury Direct locking itself in? Because everyone is trying to buy bonds at the last minute. They’ve gotten really hot.”
Very hot. Words that have literally never been used to describe US government obligations.
Bloomberg’s Alexis Leondis said the reason for the treasury glow is twofold: First, they pay a lot more than before. And second, while you could argue that there are many governments around the world that pay similar yields for their bonds, the United States is special. The high payout of US government bonds – considered the safest investment – is quite unique.
I’ll take my boring links, thanks
Normally, you don’t want government bonds to be sexy or pay a lot of interest. Government bonds usually only pay big dividends when an economy looks unstable or on the verge of collapse and for this reason investors are hesitant to buy these bonds as there is a very real risk that the country may not be able to pay them. return. But that’s not what’s happening here, said David Enna. “It’s the Fed,” he asserted. “That’s the reason for all of this.”
The Federal Reserve, as part of the COVID stimulus, was buying billions of dollars worth of government bonds every week (it was a way to move money around the economy). The Fed largely stopped doing that, which led to a rather sudden and quite significant drop in demand for government bonds.
At the same time, big buyers like China and Europe have slowed their purchases of US government bonds due to their own economic troubles. Result: Overall demand for US government bonds is down sharply, but not because the US is seen as a riskier bet.
Golden moment for investors
This confluence of events has created something of a golden moment for investors: people can make a decent, predictable return on an investment that doesn’t really involve risk. There aren’t many investments that can promise that right now.
Andrea Hsu and I tried dozens of times during the day to buy our bond. The site crashed again and again. Around 6 p.m., I was finally able to access the purchase page. I called Andrea right away. “I’m so excited!” she says. “Let’s do it!” “Here we are!” I said and pressed the submit button. The site crashed.
At 9 p.m., after 11 hours of testing, morale was low. “I don’t have so much hope anymore,” Andrea said. “Around and around and around,” I said, referring to the spinning wheel my browser displays when loading a page. “I think the ties broke me.” The website crashed again.
Treasury bills are all that
According Bloomberg’s Alexis Leondis, the current payouts that government bonds offer investors may actually be closer to normal than what we’ve seen in years. She says the last ten years of US government bonds paying next to nothing is probably the anomalous situation.
“I think we have to change our perspective,” she said. “Maybe we’re moving into a more normal place.” Leondis pointed out that bond payments have been weak, largely because the Federal Reserve bought our bonds, keeping supply low.
Plus, years of near-record interest rates basically punished people trying to save money. “I’ve been saying for a long time that savers have really suffered under the Fed,” said bond watcher David Enna.
Enna said having a safe place to put money where there is a guaranteed return is like a life raft for people on tight budgets, especially with inflation eating away at the value of our money. “It’s a big deal for a lot of people, especially retirees who have to sit on cash.”
Which brings us to the shocking title: government bonds are sexy! Bloomberg‘s Alexis Leondis pointed out that rather than that sex appeal coming from some sort of extreme makeover, it’s really more of a She is all that moment, where our hero simply took off his glasses, put on a fancy outfit, and finally shined like the star he always was. The fact that government bonds are finally yielding some yield has simply served to highlight the safety and security they have always offered. “They’re like, ‘I was here the whole time,'” Leondis laughed. “The bonds were there from the start.”
For Andrea Hsu and me, popularity was mostly painful. It was like waiting in line for hours in front of the least cool club in the world. At 10 p.m., our bond purchase finally materialized. For our $100 and two days of frustration, we are able to make a profit of just under $4. However, Andrea pointed out that this would be an annualized profit and that we expect to cash out in 4 weeks…so our real the profit will instead be around $0.30. Still, it seems we were the lucky ones. The Treasury Department issued a statement saying that due to overwhelming demand, many potential bond buyers were unable to make it through. Government bonds were supposed to turn people out the door.
Where’s a velvet rope when you need it?
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