Investors Buying US Debts at Zero Percent Return

Have you ever considered investing on something that will not make money?

This can be considered as shoveling cash under the mattress and a market equivalent of that was clear on Tuesday.  Many eager buyers lined up to invest their money where it could be safe, U.S. Government debts.  And they accepted a zero percent rate of return.

Alarming Signals

The news sent alarming signals.  In times of deep economic troubles, lots of people have lost money on stocks, bonds and real estate.  This paves the way for investments offering security but no earnings acceptable.  

The development showed how investors are extremely worried that global recession in the coming year that investing on other areas might be too risky.

This could definitely reduce the cost of borrowing for the U.S. government.  Economists however are worried that it could fetter the efforts at recovery due to widespread hunkering down.  If investors keep their money off stocks and corporate bonds, this could dry up the funds of businesses which are needed for daily operations.

Hot Selling U.S. Debts

On Tuesday, the U.S. government auctioned $30 billion worth of short term securities at zero percent rates.  These will mature in 4 weeks.  Eager buyers are plentiful that the government could have auctioned off four times and it will still sell out.

Aside from this, investors are also willing to take smaller returns on another safe haven investment this time for the three-month Treasury bill.

In times of crisis, abnormal offers seem to become more acceptable.  The U.S. government debt and deficit have been spiraling upwards due to multibillion bailouts and economic stimulus package.  Most fund managers, big investors and foreign governments are thinking that keeping their cash in U.S. debts would be safer than investing it on stocks, bonds, and consumer debts.

No Trickle-Down Effect on the General Economy

The accelerating decline of the Treasury yields which experienced record lows not seen since the World War II rendered the Federal Reserve ineffective.  That’s because investors and bankers are stashing the money in Treasuries.  This money, funneled by the central bank into the financial system, has not been redistributed across the economy.

According to independent analyst Edward Yardeni, this thing happened in the last Great Depression when people accepted investment that promised no returns or even negative returns.  Yardeni said it is not a good sign that people are being busy all day just protecting their cash.

When the market realized what was happening, stocks deeply tumbled.  The Dow Jones average was down 242.85 points to 8,691.33 – a 2.72 percent decline.  Standard & Poor’s slid 2.31 percent while the NASDAQ composite shed off 1.55 percent.  

The good thing about this development is that the United States government can borrow cheaply from investors.  This could boost the efforts of Washington to finance projects designed for economic recovery.