It's not about return on investment, it's about return of investment.

[randomness]

From Business Week:

The U.S. government received record demand for its bonds in 2011, pushing longer-maturity Treasuries to their best performance since 1995 in a sign that President Barack Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits.

The Treasury Department attracted $3.04 in bids for each of the $2.135 trillion in notes and bonds sold, the most since the government began releasing the data in 1992 during the George H. W. Bush administration. The U.S. drew an all-time high bid-to-cover ratio of $9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay zero percent interest.

This is one of those things that tends to go on until it reverses abruptly. On the other hand, as long as the Europeans continue their Keystone Cops routine, it'll probably continue.

(I don't know why the dateline on this Bloomberg wire story is tomorrow, however.)

Comments

[cerebralpaladin.livejournal.com]

I have a random question about this. My understanding is that the US Treasury won't sell Treasury bonds with a negative yield (i.e. selling a bond for $500 that pays $499 at the end of a year). (Yields on outstanding T-bills can go negative, but that's based on prices in the secondary market, I think.) At the same time, if the bonds are oversubscribed at 0% interest, there would presumably be demand for bonds that had a very small negative yield, which would obviously be advantageous for the government. Do you know, is there a good reason that the government maintains a 0% floor in its sales?

[r-ness.livejournal.com]

As I understand it, negative interest rates are difficult to arrange because cash exists.

Rates below zero can and have existed in the secondary market but the easy availability of government obligations which pay zero percent makes issuing Treasury bonds with a negative yield a non-trivial problem.

Willem Buiter discusses this problem, and in particular ways to get around it, in a blog post at the FT:

Currency is the only problem. Paying positive interest on currency is difficult because you don’t know the identity of the owner. The same note could be presented repeatedly to earn the interest due for a single period. To get around this problem, the instrument itself must be clearly identified as current or non-current on interest. Once interest has been paid, it is marked, traditionally by stamping it or by clipping a coupon off it.

With negative interest, the problem is not the owner turning up too often to claim his interest. It is getting him to turn up at all. Since the authorities don’t know I am the owner of the currency I own, why should I volunteer to pay the government money for the privilege?
It is this prima facie trivial obstacle of paying negative interest on currency that has prevented central banks from breaking through the lower floor (no stories about Switzerland, please).

Stricly speaking this story must be qualified in minor ways. If currency is the most liquid security, no other risk-free nominal instrument can earn less than it, net of carry costs (costs of storage, safekeeping and insurance). Carry costs for currency are higher than for Treasury bills or reserves with the central bank. The zero lower bound is therefore, strictly speaking a lower bound somewhat below zero. But not enough to achieve a minus five percent Federal Funds target rate.

He lists three ways to deal with this, none of them--in my opinion--politically feasible in the current environment:

• (1) Abolish currency.


• (2) Tax currency and ‘stamp’ it to show it is ‘current on interest due’.


• (3) Unbundle currency from the unit of account.

I know the first two have been tried in various times and places and things have not worked out very well.

I do think negative interest rates are a lot harder to accomplish than Buiter claims, but his post is more a thought experiment than anything else, so I think he is deliberately underestimating the difficulty in doing so. I am also skeptical of the utility of screwing with currency in such an obvious way; it's already the case that money is a social fiction, but making that more clear to everyone--as opposed only to people who pay attention to finance--that it is so easily manipulable probably has social costs that Buiter evidently doesn't care about as much as I do.

Put another way, I grant that making negative interest rates possible would be helpful to central banks. I'm just not sure that the benefits of this outweigh the problems it may cause to the rest of society.

[achinhibitor.livejournal.com]

If I remember correctly, in the dark days of 2008/2009, there were one or two auctions for the shortest-term US securities which did have a negative yield. The advantage of Treasury securities was that you could be assured of getting your money back at maturity, which at that time, no bank could offer. I hadn't though of the currency alternative, but I suppose turning your $100 million into 1 million $100 bills might prove logistically difficult.

Googling 'treasuries "negative interest"' turns up various references. One reference states that "the dark days" I referenced above crossed a year-end, and institutional investors want to have good-looking assets in their funds at that point, which artificially increased the demand for Treasuries.

[r-ness.livejournal.com]

Yeah, I think the detail here is that the rate was an auction result, and thus more like what happens in the secondary market. Moreover it was, as you say, "dark days".

The times when (1) and (2) were tried were also pretty dark days, if I remember right.