JIM LEHRER: Next tonight, how investors fled for safety to government securities this week. Jeffrey Brown has that story.
JEFFREY BROWN: As an article in today’s newspaper put it, “When was the last time you invested in something that you knew wouldn’t make money?”
In a world of financial pain and uncertainty, nervous investors are turning to what remains the safest thing going: U.S. government debt. And they’re doing it to the point of accepting essentially a zero percent rate of return — for a while yesterday — and historically low yields that continued today.
Vikas Bajaj co-wrote that article today for the New York Times. Also with us is Nick Perna, managing director of Perna Associates, an economic analysis consulting firm.
Well, Vikas, help us understand this. What happened yesterday? What kind of investments are we talking about?
VIKAS BAJAJ, New York Times: Sure. We’re talking about the U.S. Treasury bills, which are short-term debt issued by the U.S. government to fund its various operations, you know, money that could go to pretty much anything that the U.S. government does.
And, you know, a colleague of mine today said that, look, it’s not so much about whether you get a return on your money. When was the last time you bought something, an investment, where you got your full money back, where you had your money returned? Certainly in stocks, that’s not true. Certainly in a lot of corporate bonds, that’s not true, in a lot of mortgage-backed securities that is definitely not true.
So this is a question of, what can you put your money into that you know it’s going to be there when it matures?
JEFFREY BROWN: So, Nick Perna, does that sound right to you? Does that sound like what’s going on?
NICK PERNA, Perna Associates: Yes, it’s that, plus the fact that short-term money rates are dominated by what the Federal Reserve does. So the Fed, over the last year-and-a-half, has brought the Fed funds rates down from 5.25 percent to 1 percent.
So even if there were not a flight to quality, you’d still get very little on Treasury bill rates and the like because whenever the Fed works its magic to bring down the Fed funds rate, it affects all short-term rates.
Treasury options for everyone
JEFFREY BROWN: Nick, I just want to understand this a little bit more for our audience. Explain these Treasury options for the layman a little bit. What's offered? For what length of time are we talking about? And who are these investors we're talking about?
NICK PERNA: Yes, that's a good question. I mean, the Treasury offers securities ranging in maturity from as short as four weeks out up to 30 years. And what we're particularly talking about is what's happened to the four-week measures and to the 90-day Treasury bill rate, both of which have, as Vikas mentioned, approached zero percent.
And these are very, very important for the short-term money market funds, because there's been a flight to quality into these funds, and there's concern over their longevity, given what's happened to Treasury rates.
JEFFREY BROWN: And are the investors -- is it big investors? Is it millions of folks like me and you through these big investors? Who are we talking about?
NICK PERNA: I think it's almost everyone. I know I personally fled to the security of some Treasury money market funds, but I think you're finding increasing numbers of companies parking money there for exactly the reasons Vikas mentioned, which -- I think it was either Will Rogers or Jim Rogers, the investment guy, who said that at times in markets it's more important to get -- the return of the principal is more important than the return on the principal, and that's exactly what's happening right now.
Fundamentals of system 'locked up'
JEFFREY BROWN: So, Vikas, what does this tell us about the -- what kind of signals does it send about the economy? Or is the question, what does it tell us about what investors are seeing going forward?
VIKAS BAJAJ: Sure. Well, there's two things here. There's, one, the technical fact that people are moving into T-bills because of what's happened in the money markets.
You know, when a bunch of people after the Lehman bankruptcy decided that they didn't want to have any exposure to commercial paper, they went into the T-bill market. And there's just not enough T-bills to satisfy all of that demand. So that can be explained in part as sort of a technical shift in the market.
The other part is that people are really afraid that we're headed into a very long, sustained period of contraction. People are worried about deflation.
You know, just a few months ago, you know, earlier this year, we were talking about inflation. Now the primary concern in the bond market is that we're going to have deflation.
We haven't had the 10-year Treasure note, which is -- you know, does not suffer from these technical issues at such low levels as we have it now since the late 1940s.
JEFFREY BROWN: Now, Vikas, just staying with you, is it not a good thing -- I mean, at least considering the alternatives -- that the U.S. Treasury, U.S. government debt is still considered the safest place to be?
VIKAS BAJAJ: Sure. I mean, certainly, I said that in the article this morning the silver lining, such as it is, is that the U.S. government has to borrow a lot of money for the various bailouts and economic stimulus packages that have been introduced and that are sure to be introduced in January. And so, in that sense, this is good, because, you know, investors are still flocking to U.S. Treasuries.
It's bad in the sense that what this says about investors' willingness to allocate capital within the financial system, they're not buying corporate bonds, they're not buying high-yield bonds, they're not buying mortgage securities, they're not buying commercial mortgage securities.
The sort of very fundamental, sort of bedrocks of our financial system are sort of locked up in some ways. And the government is basically having to come in and appropriate that capital, so it's the government that's buying mortgage securities or the government that's making investments into the banks and insurance companies, all these things that were historically done by the private sector.
Zero interest rates rare
JEFFREY BROWN: Nick, how do you parse the pros and cons of all this?
NICK PERNA: I think what's frightening the markets about it is that the only time we've seen zero percent interest rates in the United States was back in the 1930s. And in modern times, Japan had zero percent interest rates during the early part of the 1990s, when they were caught in the grips of deflation.
But I think, you know, this too shall pass. I think that the consensus forecast from economists is that the economy should bottom out towards the middle of next year, that the recession should end around the middle of 2009.
And I'm quite sure that, if that forecast is correct, then what you're going to see is a big drop-off in the flight to quality, that people will be then -- even before then willing to take some chances, because, if this is true to form, typically the stock market starts to pick up before the economy does, and that will mean that people will want to un-park the money that they're getting no interest on or next-to-no interest on and try to participate in the recovery.
JEFFREY BROWN: Well, let me stay with you. I mean, it's an impossible question, I guess, but on that, how do you know or can you ever know whether investors are being excessively cautious, I mean, in essentially parking money that isn't doing anything right now?
NICK PERNA: Well, I'm not sure that it's as big a deal as we're making of it right now simply because the Fed funds rate as measured, not the one that the Fed targets, but the one that they actually achieve, has been like less than 0.5 percent in recent weeks.
I'm not so sure that that's as much of a flight to quality. So the flight to quality at the very short end of interest rates is really more the magnitude of a half a point or a quarter of point or something like that. It's not measured in large percentage points.
However, having said that, we do have very wide spreads between riskier corporate investments and Treasuries. Those, too, should be coming in as the economy shows at first some signs of less deterioration and then some signs of impending improvement.
Many are staying out of market
JEFFREY BROWN: Well, Vikas, what are the people you talk to -- what are they looking for or what do we all look for, especially in these Treasury options, to know what kind of direction we're going?
VIKAS BAJAJ: Yes, I'm not sure you'll find it in the Treasury options. I think where you might find it is some desire by investors to start picking away at corporate bond market. You know, if you have investors more willing to buy bonds issued by top-quality companies at, you know, modest returns, then you sort of -- you will start to see some sort of risk appetite coming back into the market.
I mean, so far we have seen very little of that, even the best of the best companies, in terms of credit worthiness, are having to pay really high interest rates to get deals done. And so far a lot of people are just sort of choosing not to come to the market because they can't get a good interest rate.
So I think those would be some of the first signs I would look for is that we start to see people being able to raise money in the private market at rates that are, you know, maybe not what they were during the boom, during the credit boom, but a little bit lower than where we are today.
JEFFREY BROWN: All right, we'll look for that with some hope, I guess. Vikas Bajaj and Nick Perna, thanks very much.
VIKAS BAJAJ: You're welcome.
NICK PERNA: You're welcome.