The Treasury asked investors if they would buy U.S. debt with a negative yield. Some said, "Yes."
The financial times we live in, they are strange. In a questionnaire that the government provided to its Treasury investors earlier this month, it asked if they would buy bonds that provided a negative yield. For example, a Treasury bond yielding negative 1% would cost $100 and would provide $99 to its holder at maturity. Investors would be paying the government interest for the privilege of allowing Uncle Sam to borrow their money. As insane as this may sound, some investors said they would buy these securities.
Why Investors Would Accept Negative Yield
First, think about the analogy here for us consumers. This would be like if a bank was so eager to loan us money that it provided a negative interest rate. Imagine if a bank paid you interest on your mortgage. That sure would help to build equity, but that's not how banking generally works: we pay lenders for the use of their capital.
So what's different with Treasuries? Min Zeng from the WSJ explains:
There are various reasons investors would be willing to pay out more money than they will receive back on a T-bill. Some are occasionally forced to obtain T-bills to cover their trading positions. Others with a mandate to invest only in very short-term Treasury securities may have no choice. And foreign central banks may wish to recycle their dollar proceeds from their interventions in foreign-exchange markets through the T-bills market.
These are all demand-based reasons: investors simply need Treasuries so badly that they would be willing to pay the government to get them. This speaks to a more fundamental cause: there is no substitute for the full faith and credit of the United States. Other bonds don't cut it, even if they're AAA-rated. So investors are willing to pay a premium for the certainty that they provide.
But Why Not Cash?
On some level, this is still pretty odd though. Why can't trading positions just be covered with cash? Why don't investment house mandates require either short-term Treasury securities or cash? After all, the U.S. government stands behind its currency as well -- but it won't cost you any additional money to hold it like a negative yielding Treasury would.
Just because the logic here can be explained doesn't mean that it makes sense. Any law that gives Treasuries a regulatory advantage over cash should be revisited. Any fund that requires short-term Treasuries should also allow cash. If I were an investor in such a fund, I certainly would prefer to take my chances with cash rather than pay a premium for Treasuries.
Let's Issue These Bonds!
With that said, if investors are willing to accept negative yielding Treasuries, then the U.S. should issue as many as possible as quickly as possible. We just found the best deficit reduction method yet: issue more debt. As long as such madness exists, we might as well capitalize on it.
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