According Bloomberg, US 90-day T-bills are pay zero interest right now. That's right, zero:
Why on earth would people pay a dealer's commission to buy something with a zero interest rate for the next 90 days? Here are some possible explanations:
- The US economy may be in serious trouble, but for the next 90 days (even 2 years or 10 years, judging from these interest rates) people think the US is far less likely to default on its debt (or experience rampant inflation) than any other country. This is a flight to safety.
- Further, people expect that even though the US economy is in trouble, other economies (especially those using the Euro) are likely to inflate much more rapidly over the next 2 - 10 years. If their own currency suffers from inflation, then holding assets in US bonds will net them major gains in terms of, say, the Euro. If the Euro inflates more rapidly than the US$, then the US price of Euros will continue to drop over time. Shifting 100 Euros to the US might (according some people's expectations) lead to a return of 110 Euros two years from now if this happens, even if the funds in US$ earn nothing!
- Another possibility: some people think there has been a gold bubble. If so, they would rather earn zero (or very low returns) rather than suffer a capital loss from holding gold or other commodities. [think of the folks who lost small fortunes in the late 1970s when the price of gold dropped from $900/oz to $300/oz]
- Maybe I misread the Bloomberg charts. I admit to this possibility.
Nevertheless, my best guess is that people really are at their wits' ends and have no idea what might happen over the next 90 days, 2 years, or even 10 years. If the Euro crashes or if the Middle East erupts, in either case, US t-bills look comparatively safe. Note my emphasis on the word "comparatively".
So why don't more people put their money in Cdn T-bills, Aussie T-bills, etc.?
My friend, King Banaian (presently a representative in the Minnesota house, and a fine economist) says it's because there aren't enough of these other T-bills for any of them to form a strong alternative to US T-bills.
But I certainly would expect more positive action for Canadian currency and Canadian T-bills. As I wrote to my friend, Romero, this morning, I expect the price of the Canuck buck to rise to $1.10US eventually. But when and how long it will take to get there is way up for grabs. And meanwhile other things can change to affect this exchange rate.
Addendum: For more on the problems (and flight from) the Euro, see this. Excerpt:
Another current of gloom, slower-moving than the debt crisis but just as ominous, is also in full flow. The outlook for the euro-area economy is deteriorating fast, which augurs ill for attempts to wrest the finances of indebted countries under control. At best there will be a wrenching slowdown; at worst, a relapse into recession.
Put differently, if you are CFO for a major international firm, would you rather place some short-term funds in banks that might be in big trouble any day now because of their holdings of risky sovereign debt? Or would you rather just park the funds in US gubmnt t-bills. I can understand why lots of CFOs would take the latter option.