Investor Fear Drives US Treasury Yields To Near Zero

by Staff - December 7th, 2008 - Breitbart

The panic in global financial markets has sparked an unprecedented rush into safe US Treasury securities, driving yields on short-term government notes down to almost zero.

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But Bob Eisenbeis, analyst at Cumberland Advisors, said the unprecedented low yields are a sign of "dysfunction" in markets. Eisenbeis said US municipal bonds are paying upwards of 6.0 percent tax-free and corporate bonds even more, but that fears of default and a lack of knowledge about underlying bond quality have led investors to shun these alternatives.

The concern about bond quality is almost certainly related to the discovery that high risk sub-prime mortgages were fraudulently packaged as low risk instruments. The affordable housing boom has now turned into a total market housing bust that is harming all Americans who own homes. With 10% of the homes in America in either default of foreclosure, it is unlikely that home prices will recover for years. In the meantime, borrowing on a house is nearly impossible, no matter how much of a down payment you are willing to pay.

If deflation continues to occur the boom to bust cycle in Treasury notes could become a reality. Though most do not perceive that the U.S. Government would ever default, the explosion in debt that Barack Obama is promising could well drive even our federal government into default. What will happen to Social Security, Medicare and Medicaid if our nation goes bust?