The bond that broke the internet

Last week I saw a headline that stopped me in my tracks: Low T-bills are suddenly sexy. Yes, treasury bills! I have never – in over 15 years of dealing with business and economics – have I ever seen the words “sexy” and “T-bills” in the same sentence.

And for good reason. In the investment world, T-bills would never be considered sexy. That would be tech stocks, crypto or maybe NFTs. Cashiers would be those who wear sensible shoes, drive under the speed limit and shop at Costco.

“I feel like everybody’s thinking about this low, boring world of T-bills,” said Alexis Leondis, who wrote the trail-stopping headline and accompanying article. Bloomberg: “And I say, ‘They’re not like that anymore. They deserve a second look.'” Leondis is not wrong. Treasuries (aka Treasuries, T-bills, T-bills) have seen a truly remarkable glow. Sensible shoes and all.

One bond in particular, the Series I Savings Bond, has become so popular that would-be buyers crashed the Treasury Department’s website last week (TreasuryDirect.gov, where you can buy the bonds). What’s happening? What happened to Treasuries to make them sexy?

Anatomy of a bond

A bond is essentially a loan. You lend the government, say, $100, and after the bond matures (in 4 weeks, 6 months, 10 years, etc., depending on which bond you buy), the government pays you back plus a little interest.

US Treasury bonds are considered one of the safest investments in the world with essentially zero risk. Also basically zero reward. “Until recently, I thought ‘boring’ would be a perfectly accurate word to describe Treasuries,” Leondis said. “And it’s not really worth looking at for most people because the rates were so incredibly low. Like, less than 1% low.”

Back in January, the government paid a yield (interest payment) of about 0.05% for 4-week bonds. This means that if you invested $100 in a four-week bond in January, you would get back $100.05 at the annual rate. A nickel for your trouble.

Today, however, it’s a different story. Right now the 4 week bond is paying almost 4%. Almost 80 times higher payout for investors.

Overall, government bonds are giving investors the best payouts in years: 4%, 5%, 6%. That’s a lot better than the return you’re getting in the stock market right now (the S&P 500 is down nearly 20% so far this year), though it’s still not enough to keep up with inflation.

The bond that broke the internet

Which brings us to the bond that broke the internet: The Series I Savings Bond. These are government bonds that are adjusted for inflation and pay an annualized interest rate higher than 9.6%. The deadline to lock in this rate was Friday 28 October (after which rates dropped to around 6%): Hence the website crash.

TikTok, Instagram and YouTube are full of financial advisors instructing people to visit the Treasury website and buy bonds as soon as possible.

Fellow NPR reporter Andrea Hsu and I decided to take this advice to heart. We thought we’d pool our own money and jump on the bond breach.

Series I savings bonds required a six-month commitment, so Andrea and I started small with the cheapest bond out there: a 4-week bond that we split: $50 each. We tried to log into the Treasury website several times, but were met with error message after error message. “I’m a little worried,” Andrea said after a few minutes.

“They were very hot…”

According to David Enna, who covers Treasuries for Tipswatch.com, the collapse of TreasuryDirect and people vying for bonds like they’re tickets to a Lizzo concert is very, very new.

“That’s something that doesn’t normally get attention,” Enna explained. “Why is Treasury Direct locking up? Because everyone is trying to buy bonds at the last minute. They are very hot.”

Very hot. Words that have literally never been used to describe US Treasuries.

Bloomberg’s Alexis Leondis said the reason Treasuries have lit up is twofold: First, they’re paying a lot more than they used to. And second, while you could argue that there are many governments around the world that pay similar yields on their bonds, the US is an exception. The high payout for US government bonds – considered the safest investment around – is quite unique.

I’ll have my handcuffs dull, thank you

Normally, you don’t want Treasuries to be hot or pay a lot of interest. Government bonds usually only pay out a lot when the economy appears unstable or on the verge of collapse, and for that reason investors hesitate to buy these bonds because there is a very real risk that the country will not be able to repay them. rear. But that’s not the point, David Enna said. “It’s the Fed,” he claimed. “That’s the reason for all this.

The Federal Reserve was buying billions of dollars worth of government bonds every week as part of the COVID stimulus (it was a way to keep money flowing through the economy). The Fed largely stopped doing that, leading to a pretty sudden, pretty big drop in demand for Treasuries.

At the same time, big buyers such as China and Europe have slowed purchases of US government bonds due to their own economic problems. The result: Overall demand for US government bonds is falling sharply, but not because the US is seen as a riskier bet.

A golden moment for investors

This convergence of events has created a kind of golden moment for investors: People can make a decent, predictable return on an investment that doesn’t really involve risk. There aren’t many investments that can promise that right now.

Andrea Hsu and I tried several times throughout the day to buy our bond. The page crashed again and again. Around 6:00 PM I finally got to the purchase page. I immediately called Andrea. “I’m so excited!” she said. “Let’s go!” “Here we are!” I said and hit send. The website crashed.

Andrea Hsu and Stacey Vanek Smith react to the crash of the Treasury Direct website processing their bond purchase.

/ Andrea Hsu

/

Andrea Hsu

Andrea Hsu and Stacey Vanek Smith react to the crash of the Treasury Direct website processing their bond purchase.

At 9 p.m., after 11 hours of effort, spirits were low. “I don’t have that much hope anymore,” Andrea said. “Around and around and around,” I said, referring to the spinning wheel my browser displays when the page loads. “I think my bonds broke. The website crashed again.

These are all government bonds

According to Bloomberg’s Alexis Leondis, the current payouts government bonds are giving investors may actually be closer to normal than we’ve seen in recent years. He says that the past ten years, when US government bonds have paid almost nothing, is probably an abnormal situation.

“I think we need to change our perspective,” she said. “Maybe we’re entering a more normal place. Leondis pointed out that bond payouts have been low, primarily because the Federal Reserve has been buying our bonds and keeping supply low.

Also, years of near-record low interest rates essentially punished people who tried to save. “I’ve been saying for a long time that savers have really suffered under the Fed,” said bond watcher David Enna.

Enna said having a safe place to put money where there is a guaranteed return is like a life raft for people on a tight budget, especially when inflation eats away at the value of our money. “It’s a big problem for a lot of people, especially retirees who have to sit on cash.”

Which brings us to the shocking headline: Treasuries are sexy! BloombergAlexis Leondis pointed out that rather than this hotness coming from some extreme makeover, it’s really more She is everything the moment our hero simply took off his glasses, put on a fancy outfit, and finally shined like the star he always was. The fact that Treasuries are finally paying a small return has simply served to emphasize the safety and security they have always offered. “They say, ‘I’ve been here all along,'” Leondis laughed. “Bonds have been around all along.

Andrea Hsu and Stacey Vanek Smith were able to purchase their bond at 10 p.m

/ Stacey Vanek Smith

/

Stacey Vanek Smith

Andrea Hsu and Stacey Vanek Smith were able to purchase their bond at 10 p.m

For Andrea Hsu and me, popularity was mostly suffering. It was like waiting in line for hours outside the coolest club in the world. At 10 p.m., our bond purchase finally went through. With our $100 and two days of frustration, we can make a profit of just under $4. Although Andrea pointed out that this would be a year’s profit and we plan to pay out in 4 weeks… so our real the profit will be more than $0.30. Still, it seems we got lucky. The Ministry of Finance issued a statement saying that due to the huge demand, many potential buyers of the bonds were unable to come forward. Treasuries had to drive people out the door.

Where’s the velvet rope when you need it?

Copyright 2022 NPR. To see more, visit https://www.npr.org.

Source

Leave a Comment