For the first time ever, the U.S. government has sold a three-month Treasury that pays nothing.

From time to time, the U.S. government holds auctions where it sells bonds to raise money. On Monday, the government held an auction selling three-month Treasuries that yield 0.00%. The auction raised $21 billion.

This is not how things work in a normal economy. Lenders are supposed to be compensated for loaning money.

You may be wondering why anyone would buy a bond that pays nothing. For the most part, it’s because they think they can sell it to someone else at a profit.

As regular readers know, bond yields go down when bond prices go up. So if the price of these bonds rises from current levels, the bonds will have a negative yield.

•  Investors are loaning money to governments for almost nothing all around the world…

Worldwide, nearly half of all government bonds yield less than 1% right now. And the number of ultra-low yield government bonds should continue to increase…

In June, Forbes reported that “nearly 90% of the industrialized world economy is presently anchored by zero rates.” If you live in the developed world, there’s a good chance your government has a zero interest rate policy…

Regular readers know the Federal Reserve cut its key rate to zero in 2008. It’s left it there ever since. The European Central Bank (ECB) has also cut its key rate to zero. The Bank of Japan (BOJ) has held its key rate at zero for over a decade.

Many people thought the Fed would finally lift its key rate last month. But the Fed held off because it’s worried the global economy is struggling…and would struggle even more without cheap money.

•  Howard Marks says “we don’t have a free market in money”…

Howard Marks is the founder of Oaktree Capital, a global asset management firm that manages roughly $100 billion.

Over the past twenty years, Marks has generated 19%-plus annualized average returns for his clients. Meanwhile, the S&P 500’s annualized average return was just 10%.

In other words, Marks has outperformed the market over the last two decades. When he speaks, we pay attention.

Last week, Marks appeared on CNBC’s Closing Bell. He said:

I believe that the free market is the best allocator of resources, and we don't have a free market in money and I'd like to have one.

Interest rates are the price of money. They help people make smart financial decisions.

If you have an idea for a business that will earn 2%, but it costs 6% to borrow money, you know borrowing to start that business is a bad idea. But with rates near zero, nothing looks like a bad idea. Seven years of zero percent rates have destroyed the signal.

Incredibly low interest rates have led to all sorts of reckless decisions. These days, no business idea is too outrageous to fund…no million-dollar condo sits on the market for long…and no Apple gadget is too expensive for a student with a credit card.

This type of reckless spending is all part of the “Wonderland” economy…where nothing is too expensive if it’s bought on credit.

•  Like us, Marks worries about the damage easy money policies are doing…

Marks thinks it’s time for the Fed to end its era of easy money. Last week, he told CNBC’s Closing Bell:

There’s always some reason not to [raise rates]. What about the reasons to do it? What about getting the government out of the business of regulating the cost of money? What about stopping to subsidize borrowers and penalize savers and lenders?

The financial system is addicted to easy money. The Fed is worried about what will happen it if takes the “punch bowl” away. This will only lead to more reckless financial decisions and even larger piles of debt.

We believe that bad financial decisions and massive debt levels will cause another financial crisis. We wrote Going Global 2015 to show you how to push some of your wealth outside the “blast radius”…so the next crisis can’t wipe you out.

Going Global 2015 contains some of the best research we’ve ever published. You can put the tips and strategies from this book to work no matter where you live in the world…and no matter how much money you have to protect.

We normally sell Going Global for $99. But right now, we’re selling it for just a $4.95 processing fee. Click here to learn more.

•  Easy money policies have left gaping holes in Connecticut’s pension plan…

Connecticut is the richest state in the country. According to The Wall Street Journal, it has the country’s highest per-capita income. The average resident earns $64,864, far above the national per-capita income of $46,405…but Connecticut still can’t afford its public pension costs.

Public pensions manage retirement money for government workers. If you pay state taxes, part of your tax bill goes toward these pensions.

Regular readers know America’s public pension system is a slow-moving trainwreck. Think tank State Budget Solutions says state pensions are underfunded by $4.7 trillion. “Underfunded” is the difference between what they promise to pay and the amount of money they have on hand to actually pay it.

It’s a nationwide problem. Connecticut has just 52% of the money it needs to pay for future retirement benefits. Illinois and Kentucky are the only two states with pension systems in worse shape.

Connecticut Republican Senator L. Scott Frantz has called the state’s pension system a “ticking time bomb.” The Wall Street Journal explains how the state got itself in this mess.

Connecticut’s unfunded pension liabilities more than doubled over the past decade to $26 billion as the state’s retirement system reeled from inadequate state contributions, a subpar investment record and longer lifespans for its retirees.

The Wall Street Journal goes on to explain how Connecticut plans to fix its $26 billion problem.

Some Connecticut officials and union leaders said they are unfazed by the pension problems and pledge to reverse the deficit in the coming decades. Their strategy hinges partly on predictions the various state retirement systems will be able to earn 8% or more annually, a goal that is more optimistic than most public pensions across the U.S. The average target for all state plans is 7.68%, according to the National Association of State Retirement Administrators.

The Wall Street Journal is right to point out that an 8% annual return is “optimistic.” Public pensions typically don’t earn average returns anywhere near that. The average public pension earned just 3.4% last year.

•  Pension funds are finding it harder than ever to earn a decent return…

Casey Readers know that, due to the Fed holding interest rates near zero, it’s nearly impossible to earn a decent return on income investments today. The yield on a 10-year Treasury is just 2.0%. That’s half of what it was six years ago. Yields on corporate and municipal bonds are also near record lows.

•  Most public pensions will never come up with the money they owe…

They’re on the hook for trillions of dollars…and there’s almost nothing they can do to fix the problem. Plus, almost every state has laws in place that make public pension reform next to impossible.

We see this ending one of two ways…

Underfunded pensions could keep paying out more money than they bring in. This will eventually turn into a full-blown crisis that bankrupts state and local governments. Senator Frantz fears this outcome. He worries Connecticut will “end up as another Detroit” if it’s not fixed.

Governments could also make the taxpayer foot the bill. We think this outcome is far more likely.

Chart of the Day

Easy money policies have cut yields in half…

The chart below shows annual yields for Treasuries, investment-grade (AAA) municipal bonds, and investment-grade (AAA) corporate bonds. “Investment-grade” means the company that issued the bond is in good financial shape.

The green bars show the average yield for each bond in 2008. The blue bars show their current yields.

All three assets are widely thought of as safe. They’re very popular with retirees and other income investors. Right now, each bond is yielding half of what it paid seven years ago.

Since 2008, the yield on 10-year Treasuries has declined 44%. The yield on 10-year corporate bonds has declined 50%. And the yield on municipal bonds has declined 45%.

Regards,

Justin Spittler
Delray Beach, Florida
October 08, 2015

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