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Author: BaumgrenzeJohn One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19483  
Subject: 3 and 6 Month Treasuries Date: 10/8/2008 3:58 PM
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Will someone help understand the 'economics' of falling rates of return on short term treasuries?

I can see that the Fed may want to cut rates to stimulate the economy; cheaper rates to borrow makes it easier for a companies to finance expansion and operations.

What I cannot see is why anyone with capital to invest would invest in an instrument whose interest rate seems to be falling to 0% or into 'negative territory.'

Is it not the case that the government finances its short term operations via these instruments? If they cease to offer a return, who will buy them?

Is it 'voodoo economics' to conclude that whenever the rate of return on these instruments is significantly less than the rate of inflation, they are a de-facto form of 'voluntary taxation?'

I am not a 'disinterested party.' I have investment responsibility for a 90+ year-old relative. We have her in 180 day treasuries because

a) they are 'safe;'

b) they are consistent with a 'prudent investment' for an individual whose estate may need to be settled sooner rather than later; and

c) until recently, they returned enough to more than cover her expenses.

In a month, I need to decide whether or not to reinvest.

The days of a sufficient return appear to be at an end. How long will it be until foreign holders of US debt come to the same conclusion? What will be the consequences?

Thanks for any insights.

baumgrenze
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