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Peter Schiff: US Treasuries Are a “Lousy Deal”

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Are US Treasuries a good investment right now?

Not if you consider the rising inflation rate. In fact, in his most recent podcast, Peter Schiff called US Treasuries a “lousy deal.”

Producer prices (PPI) came in unchanged in July, but year-over-year, we had a 3.3% increase in wholesale prices. PPI serves as a leading indicator for consumer prices, so you can probably expect the prices you’re paying at the store to continue to go up.

According to the government, consumer prices are already increasing at a 2.9% annual clip. Peter said it’s just a matter of time before the consumer price index pushes past the 3% threshold.

We’re almost at 3%. The only question is how much longer with the CPI have a two handle before it has a three handle. The PPI already has the three handle on it. So, it won’t be long before the CPI has the three handle. In fact, I think we’re going to move from a three handle to a four handle much, much quicker than we moved from a two handle to a three handle.”

Meanwhile, the dollar remains strong. In the SchiffGold Friday Gold Wrap last week, Mike Maharrey noted that gold has not gotten the safe haven bump you would expect despite a lot of global turmoil right now because a lot of the safe haven bid is going into the dollar. It’s not only the dollar that’s benefitting. The currency turmoil in a number of emerging markets and the budding crisis in Turkey is boosting US Treasuries. Yields on the 10-year have dipped back below 3%, hovering in the 2.85% neighborhood last week.

Peter said a 3% 10-year Treasury is actually a “lousy deal” when you factor in inflation.

If consumer prices are rising at 2.9% per year – and of course, that’s just what the government claims. I mean, obviously, if the government is admitting that prices are rising 2.9%, they’re obviously rising much more than that. Right? Because the government is lowballing the estimate of CPI. But let’s just take it at face value. Let’s assume the government is right and consumer prices are rising at just 2.9% per year. Well, if the government is borrowing money and giving you 2.85% per year, what does that mean? It means in real terms, you are losing money, because the interest that you’re getting doesn’t even equal the annual depreciation of the domestic purchasing power of the dollar. So, you loan the government money, and you don’t get the money back for 10 years, but the little bit of money they give you every year does not even offset the amount of purchasing power you lose.”

Simply put, the money you get back in 10 years is worth less than the money you loaned the government.

And consider this – the CPI isn’t fixed, but your coupon is. When you purchase a 10-year Treasury, you’re locking yourself into that 2.85% interest rate for 10 years. But the inflation rate is not locked in.

And if you look at the trajectory – the trend of consumer prices – and you understand what’s powering that trend, the rate is likely to continue to rise during the entirety of that 10 years. And so, the real yields are going to get even lower as inflation moves higher, and higher, and higher.”

On top of that, income from Treasuries is taxable. Peter did the math and determined that the real, after-tax yield on a 10-year treasury comes to -1.2%.

That’s not a good deal. Maybe all of the people counting on the dollar and US Treasuries as their safe-haven instead of gold should rethink that strategy.

Peter goes on in the podcast to talk about the growing crisis. He said the real Turkey is America. Give it a listen.

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Photo by DonkeyHotey via Flickr


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