Examining actual interest rate structure in the U.S. currently, we found that ma

Question

Examining actual interest rate structure in the U.S. currently, we found that many Real rates, including ALL Treasury Bond rates, were negative. Based in the Fisher model, this is an outcome we would never expect to see. It means that participants in the T-Bond market are not even recovering the value of their investments that is lost to price inflation: They are actually paying the government to borrow their money! Before 2008, this market situation had never occurred for a sustained period of time. Participants in the T-Bond market are generally knowledgeable and expert. The Question is this: Why is it that under current market conditions market participants are willing to accept negative real returns on their loans to the Treasury?

Explanation / Answer

The market participants have had some bad experiences investing in the equity markets in the past two decades, be it the dot-com crisis or the sub-prime mortgage crisis. With these experiences, investors have largely become risk averse and are not willing to invest their assets in equity markets with the average returns of the market being around 6-8% and having a significantly higher risk profile than the T-Bonds which have zero risk and having long term yield around 2-4%.

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