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The Good News and 'Very Disturbing News' of Zero-Yield Treasuries

Posted Dec 10, 2008 12:30pm EST by Aaron Task in Investing, Recession

One of the most shocking developments in a shocking year occurred yesterday when the Treasury auctioned $30 billion of four-week notes with a yield of 0% (yes, ZERO, as in nada).

Incredibly, demand for the zero-yield notes was so strong the government could have sold four times as much, and previously issued four-week notes traded with negative yields Tuesday.  In other words, investors were content to suffer a quantifiable loss of 0.1% to 0.2% vs. risk bigger losses in other assets.

This is "good news" because it means the government can finance the massive stimulus package necessary to aid the economy, says James Galbraith, economics professor at the University of Texas at Austin and author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too.

But the reality of zero-yield Treasuries is also "very disturbing news [because it] says there's a wholesale flight from the private credit markets into the safety of public bonds," adds Galbraith, the son of famed economist and author John Kenneth Galbraith.

It is because of this "collapse of the [private] credit mechanism" and "violent decline of private sector activity," that Galbraith believes the economy needs as much as $1 trillion of fiscal stimulus, as detailed here.

"Every which way it is up to the capacity of the U.S. government to step up and act," he says. Otherwise, the causes of the mass layoffs announced to date (and the impact of the layoffs themselves) will spill over into other sectors of the economy and cause "much, much more complicated problems in a few months."

101 Comments

d
d - Wednesday December 10, 2008 12:42PM EST

Obama's pork barrel spending plan is the single dumbest idea in human history, bar none. Who is he to spend my taxpayer money in a depression? Obama actually said that changing light bulbs in federal buildings will provide jobs. Pork barrel spending is always bad, especially when we are broke as a nation.

__A_YAHOO_USER__
__A_YAHOO_USER__ - Wednesday December 10, 2008 12:42PM EST

I think that is Mr. Hendry Paulson last moves in the Chess Board.a very good moves unconventional.......Is there any wrong with it......?.......

Kelly P
Kelly P - Wednesday December 10, 2008 12:56PM EST

People are accually loaning the US government money at a negative interest rate. Am I the only one that finds this completely insane? Who, other than the FED, would do that?

Yahoo! Finance User
Yahoo! Finance User - Wednesday December 10, 2008 01:01PM EST

What it really bodes is the abandonment of the big Mutual Fund Co.'s running from the market into Govt. Bonds with no yields instead of the volitile maket. God help the 401K's.

Manuel
Manuel - Wednesday December 10, 2008 01:06PM EST

Yes Virginia, there is a Santa Claus, and he does hand out presents to all the stupid boys and girls. (In the form of bailout's and pork spending). But you have to know how to get a handout. First make a salary that is more than you deserve, then make big profits for your croonies, and when the money runs out, go ask S.C. for his money. He can always print more, because he doesn't live in the real world where we live...Merry Christmas Virgina, Merry Christmas!!

Mark
Mark - Wednesday December 10, 2008 01:08PM EST

SORRY JOHNNY ONLY UNDERSTAND ENGLISH

sean c
sean c - Wednesday December 10, 2008 01:08PM EST

every day brings a new challage a start for change starts in every ones mind.We produce the results we pre meditate on a daily basis each person need to dig deep and figure out what exatly they can live off.The promblem is the balance of rich and poor each company needs to look at thier bottom line to break even and offer what they can pay with the expected results, for example union worker getting 70 dollars a hour just to lose their pension and thier jobs cause thier not willing to work for a wage that will allow the company to keep them employed and still give them a job we are to about now and not about tomorrow wich is the key to are survival the day of huge profits are over figure what you can do to create a balance.Dont keep the same and burn though the money the goverment is giving you use it to succed not to stop the bleeding.Greed will pay you today but tommorow you will end in sorrow!

RaymondD
RaymondD - Wednesday December 10, 2008 01:09PM EST

If everyone put both of their hands into their pockets and kept their mouths shut, "the market" wouldn't move! And, let me ask this question - Why doesn't the Treasury just print an extra trillion $ of money and supply IT to "the economy"? The U.S. dollar is already in the crapper and the continued bailouts of company after company ISN'T inflationary? Just who is kidding who here?

MichaelM
MichaelM - Wednesday December 10, 2008 01:10PM EST

This guy is an outdated economist. Massive fiscal stimulus using borrowed money will actually make things much worse. Unfortunately, guys like this who call themselves economists have very little understanding of economics. They analyze things as though time is static because they do not have the intelligence to understand the dynamic nature of an economy.

matt m
matt m - Wednesday December 10, 2008 01:11PM EST

Everyone wants to knock Obamas plans but where have all of Bushs big plans got us?

alejandro
alejandro - Wednesday December 10, 2008 01:11PM EST

Well I think we can thanks the Bush administration for this ....sometimes I wonder if he is pro or against AMERICA. Actually I don`t wonder anymore ......

azfan
azfan - Wednesday December 10, 2008 01:17PM EST

To financeupdate: Um, he's the president. At least at the end of his spending, we'll have roads and bridges and infrastructure. What did we get from the AIG bailout? The Citi bailout?

madmilker
madmilker - Wednesday December 10, 2008 01:18PM EST

Beetle and friends.........madmilker needs your help.

William
William - Wednesday December 10, 2008 01:19PM EST

These are the small developments that stay under the radar. Wrap your head around how insane this mess has become. There is nothing left.

Yahoo! Finance User
Yahoo! Finance User - Wednesday December 10, 2008 01:21PM EST

hope for the best

mihir
mihir - Wednesday December 10, 2008 01:24PM EST

To financeupdate: To answer your first quesstion: Obama is your president Second: did you question the republicans in the govt and Bush who have been bankrupting the country for the last 8 years..while consulting buddies of Cheney, Bush etc have been filling up their coffers with contracts in the US, Iraq etc. Where were you then - sleeping?

chulo4mami
chulo4mami - Wednesday December 10, 2008 01:25PM EST

well, so what happens when the government can't pay these back, even at zero percent or less? i guess what I'm getting at is along wi9th the suffering that the 401k's and funds are going to endure from this withdrawing of capital, I think the biggest thing we are going to look at in the long run is serious inflation. we can't pay our foreign creditors, so how is the government going to come through on these treasuries after they spend it on more socialism...uh, i mean economic stimulus? print more money, I guess.

iSpeakTheTruth
iSpeakTheTruth - Wednesday December 10, 2008 01:25PM EST

geee I'm trillions in debt so maybe I should spend more money. That makes sense. Does anyone in Congress and has Obama ever balanced a personal checkbook before? Has any of them ever paid their way or did their parents do it all for them?

Michael B
Michael B - Wednesday December 10, 2008 01:27PM EST

Do this the next time people are around you talking about how "so and so's" economic plan is screwed. Ask them their credentials, what is their alternative, and why it's not being done if it's such an "obvious" great idea. Not defending the current market or any one side. But trust me, just whip these questions out to anyone, grab a camera, and watch them say stupid things.

Shane Man
Shane Man - Wednesday December 10, 2008 01:29PM EST

8.4 trillion stolen in less than two months from the American people. This is the biggest scam in the history of the world. The Federal Reserve is a private bank, there is nothing federal about it

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