Negative US Yields

The real after inflation yield on US Treasuries is NEGATIVE all the way down the maturity yield curve.

As I write, the 30-Year T-Bond is listed at 2.14%. The May CPI came in at 0.2% – in line with the recent trend – showing the CPI rising at a 2.4% annual rate. So a 2.14% yield and a 2.4% CPI indicates a negative real yield of -0.26% per year. Over the 30 year life of a T-Bond, an “investor” would be guaranteed to lose about 7.5% of his capital!

But that doesn’t tell the whole story.

Remember, a T-Bond pays interest – and that interest is subject to income tax each year. There also is a capital loss to use as a deduction, but that isn’t available until after the 30 year maturity arrives. (You don’t have to hold it that long, but somebody does.)

The current coupon (the interest payment you receive each year) is 2.5%. On a $1000 T-Bond, you’ll get $25 in interest each year. That’s the amount that will be taxed at whatever your marginal tax rate is, for example the 25% bracket.

And don’t forget state income taxes – in my home state of Massachusetts, that’s just over 5% additional. Some cities, like NY City even have their own income taxes!

Using “just” IRS and Massachusetts, your combined rate may be 30%. So, on that $25 interest coupon, you’ll pay $7.50 in taxes. That would lower your yield from 2.14% down closer to 1.4%, and your real, after tax yield would come in around negative (-)1.00%.

So, why would anybody be stupid enough to lend their hard earned money out for a guaranteed loss of 1%? I can think of 3 reasons:

1. You really are that dumb.
2. If you’re from outside the US, you may expect your local currency to go to hell in a handbasket – or at least to fall relative to the Dollar. Since you don’t pay US taxes, you’re willing to give up the 0.26% on T-Bonds to have a liquid, relatively safe place for your money outside your home currency.
3. You’re the US FED. Most Treasuries are bought either directly through the FED or indirectly by banks who receive significant incentives from the FED. The FED is and has been the largest purchaser of Treasuries for years.

Every time the FED intervenes in the credit markets to manipulate rates lower than they would be in a Free Market, they do it by buying Treasuries. They traditionally have bought short term Treasury Bills, but during the various QEs, the FED explicitly advertised to the world that it was buying longer maturity Treasuries.

The FED is and has been the Great Monetizer of US Government debt. In the process, during the FED’s 103 year history, the FED’s debasement of the Dollar not only has overwhelmed increases of American productivity, but it also has caused the purchasing power of the Dollar to shrink by over 98%.

Negative real rates in the US are destroying the US Economy. But even positive, manipulated, lower than Free Market interest rates do harm by making business calculations less efficient and less effective.

Let’s end the FED to help the US Economy. Whether it ends through a multi-year phase out (my preference) or an immediate abolition can be open to discussion. But, giving every American the economic benefits of ending the FED is essential.