There was a time, not so long ago, when a half-percent change in interest rate was little more than a rounding error. Now a half-percent interest rate is a yield on many investments, including 10-year U.S. Treasury bonds.
On Wednesday, the U.S. Treasury Department auctioned off another $38 billion worth of 10-year bonds at a yield of a whopping 0.677%. While that’s at least 0.8% below inflation, which means buyers should expect to lose purchasing power, at least it’s a little higher than last month’s interest rate of 0.653%.
And it’s not like there was a lack of buyers clamoring to snap up the low-paying debt. The cover ratio, or the number of bidders compared to the amount of bonds available, was 2.41, which means buyers were willing to purchase 2.41 bonds for every bond available.
The appetite for such low-yielding investments might seem out of place, but investors are reacting to a force bigger than all of them, the Federal Reserve.
The central bank has committed to keeping interest rates at rock-bottom levels for the foreseeable future, and buys billions of dollars’ worth of bonds every month. The smart play in the bond market is to buy whatever you can before the Fed gets there and then sell it to the central bank at a higher price.
Of course, there is a loser in all this… that would be the average investor.
Because yields on Treasury bonds set the bar for all other debt, having them trade at such low yields means investors can’t earn a decent income on any type of bond.
This is a planned wealth redistribution program that sweeps value from savers, who earn below-market rates on fixed income, to borrowers, who pay below-market rates. And the biggest borrower of them all is Uncle Sam.