Time to Buy Treasury Bonds?

From the BBC:

The United States government plans to sell bonds worth $55bn (£34bn) next week in an effort to finance its bank rescue programme. In a first $25bn auction on Monday, the Treasury Department will launch a new type of bond, which will reach maturity after three years.

By selling bonds and notes the US government will finance the rescue package aimed at buying up Wall Street’s bad debts in an effort to ease the credit crunch which is crippling the US economy.

The administration will use some of the money raised through bonds to purchase toxic assets from troubled banks, hoping that they will increase in value once the crisis has passed.

The rest of the amount will be raised later next week through the sale of traditional 10-year and 30-year bonds. The US Treasury expects to raise up to $550bn by the end of 2008. US bonds earn a fixed rate of interest every six months until maturity.

If one thing is a safe bet, it’s the fact that we’re being bailed out, and will continue to be bailed out for some time. On first glance, the T-bonds look more reliable than many other investments in this market.

This Kiplinger’s article, however, emphasizes that T-bonds with longer maturities are easily eroded by inflation and taxes. The authors sum up the risks:

3 Strikes Against Treasuries

1. INFLATION. With inflation running at an annual rate of 5% and yields below that, Treasuries are losers — guaranteed.

2. BUDGET DEFICIT.Massive budget deficits mean a flood of new supply, which could pressure Treasury-bond prices. Congress recently raised the national debt level to $10.6 trillion.

3. WEAK DOLLAR. Foreigners hold $2.6 trillion worth of Treasury securities. If the dollar continues to lose value, they may decide to unload their Treasuries, forcing prices down (and yields up).

It’s not pretty. Who is going to buy all the government’s treasuries? Here’s the sales pitch:

What’s so good about U.S. Government securities?

T-Bills, T-Notes, and T-Bonds securities all share in common the fact that they are all free of credit risk as they are backed by the full faith and credit of the U.S. Government. What this means is that, as long as the U.S. Government is alive and kicking, your investment is 100% secure. You will always know exactly when and how much your investment will return. No other bond investment, including mutual funds, can make this claim.

The other advantage to investing in U.S. Government securities is that they are the only fixed-income instruments that the individual investor can purchase without having to go through a broker or financial institution. This means that there are no commissions or fees to pay, and that the entire amount of your purchase goes towards your investment.

Aha! T-bonds jive well with the current lack of faith in financial institutions and worries about financial security. So buyers will be none other than Main Street Americans looking for secure, long-term places to park their cash. Many will probably overlook the fact that T-bonds aren’t as secure as they initially appear.

Here’s to Round #1 of Main Street’s financing of the bailout.
I anticipate many more rounds to come.

  • Flex Rails

    yes, buy them now if you believe that government will be able to pay back all that debt it has amassed. if you don’t believe that then better go into gold ( physical or near physical such as http://tinyurl.com/5cza6a ) before government will free itself from all that debt (and rob all your papermoney, bonds included) using hyperinflation.

  • Josh

    It’s not a “bailout”, it’s a communist takeover. You think the banks are going to stop now?