[deMolay]

Is the SHTF underway? http://www.bloomberg.com/video/63981076/

[pup55]

http://www.treasurydirect.gov/instit/annceresult/press/preanre/2010/R_20101025_3.pdf

http://www.marketwatch.com/story/tips-auction-reflects-profound-uncertainty-2010-10-26

It turns out, however, that those who bought the TIPS at this week’s auction might not have been all that irrational. That’s because, according to Luis Viceira, a professor at Harvard Business School, TIPS don’t just provide protection against unexpectedly high inflation; they also protect the investor from deflation as well.

In an interview, Prof. Viceira referred to this deflation protection as a “deflation put.” It traces to an under-appreciated feature of TIPS: Regardless of how much deflation occurs during the term of the bond, which otherwise would translate into a negative interest rate, you still will get all your original principal back at maturity.

When I was a young man in business school, the first thing the crusty old Finance prof told us was that by definition, short-term US treasury debt was zero risk. The reasoning was, if it ever got to the point that there was a question of repayment, the entire finance system was screwed up...

This is why I laugh every time one of those articles shows up on here that says "US to lose its AAA credit rating" because, by definition, it can't. It's always the lowest risk in the system, and the risk of you lending your money to anybody else is relative to the amount of risk you have on Federal securities.

So, US government debt is traditionally thought of as a safe haven for anyone who wants to park their cash, and what this whole episode really means is that people are so afraid of what is happening in the system right now, they are willing to do such a thing, knowing that they will not get all of their principle back, just because they know the bulk of it will be safe.

[url]http://www.treasurydirect.gov/instit/annceresult/press/preanre/2010/R_20101020_1.pdf
[/url]
The way these things work is that the treasury bills are auctioned off, and the "winners" pay some percentage of the face value of the financial instrument. In this case, the auction "winner" paid a price of 99.97667 for these things, which have a face value on maturity of 100, so the difference is their effective interest rate....

By the way, do you also realize that when the Fed goes into the market and buys these treasury securities to keep the yield up, which is exactly what QE-2 is, that really distorts the market and causes people to not be adequately compensated for their risk? The way the system is supposed to work is that if there is more risk, of inflation, for example, the demand for these things should be lower, and the price of the security should be lower, which would imply a higher interest rate.... Well, the Fed, by going into the market and buying this stuff, is keeping the bond prices artificially high, and yields artificially low, and that is further screwing up the system.

Anyway when you see the non-inflation adjusted instruments reach a premium of over 100, it really means that either the Fed is overbuying to keep the system floating, or else people are so scared of deflation that they are willing to park money into a federally guaranteed financial instrument and get less back than they put in.

[deMolay]

Boy Pup55, I fail to understand why you are wasting your time on here at PO, counselling fools such as my self. You seem more knowledgeable on the subject than Bill Gross from PIMCO. The biggest Bond Dealer in the world. You are wasting your talents. http://www.financialpost.com/news/busin ... story.html