A Government Guarantee That You'll Lose Money

One of the classic definitions of insanity is doing the same thing over and over again and expecting different results. Only slightly behind that definition is this one: Making an investment when you are absolutely certain that you will lose money. Yet that's exactly what happened in the government bond market earlier this week.

For the first -- or perhaps second -- time in history, the auction on short-term U.S. Treasury Bills actually had government debt briefly trading at negative yields. Or in other words, whatever sucker bought at the top is absolutely, positively guaranteed to lose money when those bills matured.

Granted, the loss will be tiny: According to Bloomberg, someone who invested $1 million at the peak would wind up losing $25.56 on the deal. Still, what brainiac would knowingly, willingly, and intentionally make an investment that was guaranteed to lose money? More importantly, how can I get that person to lend me money?

Panic, anyone?
Stop and ask yourself why any investor would lend money at a negative interest rate to a country that already owes trillions of dollars and projects another trillion worth of deficits this year. I can almost understand a flight to safety that brings Treasury rates down near to zero. After all, the government's ironclad guarantee to repay its dollar-denominated debts is good as long as its Federal Reserve chairman promises to run the currency printing presses nonstop.

But below zero? That would imply that the government's promise to pay you a dollar in three months is worth more to you than having that very same dollar in your hand today. No rational investor would make that deal, and it sends a pretty clear message that this year's $8.6 trillion worth of government pork failed at its stated goal of calming the market's panic.

Wouldn't you rather get paid to invest?
It seems Treasury bills have recently become a very safe way to guarantee that you'll lose money on your investment. Fortunately for investors who are able to keep their wits about them, however, there are still ways to get decent income from your investments. The common stocks of some very strong companies currently have dividend yields well above those of Treasuries. There are even some companies that:

  • Are profitable.
  • Have no debt.
  • Are worth multiple billions of dollars.
  • Have at least several hundred million dollars of cash on hand.
  • Have stocks yielding as much as or more than Treasuries with maturities as long as 10 years!

Here are just a handful of them:

Company

Market Cap
(in Millions)

Debt

Trailing Earnings
(in Millions)

Cash on Hand
(in Millions)

Dividend
Yield

Texas Instruments (NYSE: TXN  )

$20,160

$0

$2,570

$1,990

2.7%

Lorillard (NYSE: LO  )

$10,530

$0

$843

$1,210

6.0%

Paychex (Nasdaq: PAYX  )

$9,630

$0

$574

$464

4.7%

Analog Devices (NYSE: ADI  )

$5,260

$0

$525

$1,310

4.8%

Garmin (Nasdaq: GRMN  )

$3,830

$0

$882

$540

4.3%

Maxim Integrated (Nasdaq: MXIM  )

$3,760

$0

$302

$1,260

7.3%

Interactive Data (NYSE: IDC  )

$2,170

$0

$134

$239

2.7%

Given a choice, which one would you prefer?

  • A government-backed guarantee that you will lose money.
  • The opportunity to get paid to invest and potentially see your money grow over time.

Sure, stocks are risky, and you still can lose money if the businesses behind those shares sour. At some point, the deck becomes so stacked in favor of investing in the stocks of strong companies that it would almost be criminal to ignore them. If negative Treasury bill yields don't signal that point, I'm not quite sure what would.  

The Panic of 2008 may not be over yet, but it's certainly about time to start sweeping up the tremendous bargains it's leaving in its wake.

At the time of publication, Fool contributor Chuck Saletta owned shares of Maxim Integrated. Garmin is a Motley Fool Global Gains recommendation and a Motley Fool Stock Advisor recommendation. Paychex is a Motley Fool Income Investor selection and a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy will gladly pay you $0.99 on Tuesday for $1.00 today.


Read/Post Comments (17) | Recommend This Article (62)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 11, 2008, at 4:34 PM, NJK304 wrote:

    When looking at high dividend companies with lots of cash, check out Pfizer. It now yields 7.75% and has $26 billion sitting on its balance sheet.

  • Report this Comment On December 11, 2008, at 5:13 PM, jeffduby wrote:

    Another artical telling people to invest in stocks right now. You should be ashamed of yourself. I was one of the suckers that listened to these types of blogs back in august and I lost about 30% of my investments. I wouldn't advise people to pull their money out of the markets right now, but I would certainly advise them to put their money into a six month/one year CD. This will provide positive returns until the market hits bottom. the last two weeks have provided a minor bounce because the fed has been manipulating markets and market news, not because of any market stability. If you don't believe me, ask a short seller, as we are licking our chops right now.

  • Report this Comment On December 11, 2008, at 6:04 PM, 181736065 wrote:

    In a depreciating environment when commodities and asset backed securities are plummeting, earning no or slightly negative return in a stable currency is rational.

    If you move from a depreciating currency (like Russia or nearly all of Europe, S. America and Asia compared to the U.S.), to a relatively stable one, then no or a slightly negative return is rational.

    In both cases, you make money on a relative basis - not" lose" itlike you claim in your article. You increase "wealth".

    Did you think of this?

    The "explanation" of the zero rate T-Bill results is the worst I have read so far in TMF. Before you derogatorily call these investors "Braniacs", I think you should get an education.

    .

  • Report this Comment On December 11, 2008, at 6:50 PM, dc46and2 wrote:

    I am having a hard time understanding why anyone would prefer to loan their money at negative interest. Wouldn't it be better to just keep the money? For foreign investors who want the "stability" of dollars, wouldn't it be better to just buy dollars directly instead of buying zero/negative rate T-Bills?

    fe3lixallen, could you explain why negative or zero rate T-bill's payable in dollars are better than dollars themselves?

  • Report this Comment On December 11, 2008, at 6:55 PM, GoNuke wrote:

    The US dollar is the current asset bubble. Anyone pouring into US dollar denominated assets is going to experience FX losses. Sales of zero rate T-bills is compelling evidence that the US currency is overvalued. It is a panic driven destination. The US dollar is going to fall relative to other currencies when the madness passes. US interest rates will have to rise to prop up the dollar. As soon as the world economy starts to grow again in a year or two all the people who fled to the US dollar will lose money again. I think the best advice for the medium term would be to buy Canadian government debt. The Canadian dollar has already fallen 25% against the US dollar yet the Canadian economy is closely tied to the US economy. When the world shakes off this recession Chinese and US demand for Canadian resources will push the Canadian dollar back up. The Canadian dollar has little downside and lots of upside. The US dollar has NO upside and lots of downside. Plus US T-bills offer no income.

  • Report this Comment On December 11, 2008, at 7:13 PM, 181736065 wrote:

    "Anyone pouring into US dollar denominated assets is going to experience FX losses. "

    This has not been the case recently. The only major currency which has recently strengthened against the $ Dollar is the Yen. (Although, granted, this could change.)

    The Canadian Dollar has depreciated from about $1.05 to .85 now, so - although it may turn powerful against the US Dollar in the future - it has done the opposite over the past several months.

    "fe3lixallen, could you explain why negative or zero rate T-bill's payable in dollars are better than dollars themselves?"

    The T-Bills sold at a diminutive negative rate, so "warehousing" hard currency would not have made much sense unless the purchase was gigantic.

    I really don't get where this author is coming from. Buying US Dollars short term via T-Bills is an excellent strategy for reasons I stated in my original response. To transition it into a bridge comparing the superiority of stocks (which could very easily lose another 20-30% over the next several months) to T-Bills is dicey at best, and ludicrous at worst.

  • Report this Comment On December 11, 2008, at 7:23 PM, Clark1547 wrote:

    I see a lot of people saying that now is the time to buy, this newsletter or that newsletter will give you the buys that will make you rich. I pulled most of my stuff out year ago, and thank god I did. I just didn't see any good news anywhere. I kept asking myself- why is this market going up??? I could see no reason at all. anywhere. I STILL see no good news anywhere, with the possible exception of the new administration coming in. A glimmer of hope there. but I just don't see anything good.are stocks really low??? whatever happened to the 11 PE ratio??? Isn't that where we are now??? just where we should have been had the market not gone crazy with a crazy group of people artificially pushing it to insane levels for their own personal gain??? I say trust your gut instinct. every time I listen to one of these genius's against my gut feelings I lose big. NO MORE!!! trust youselves people!!!

  • Report this Comment On December 11, 2008, at 8:23 PM, ecoloney wrote:

    1. Buy low, sell high.

    2. Be greedy when everyone else is afraid (they're certainly afraid right now). Be afraid when everyone else is greedy.

    3. You can't time the market (as in buy at the bottom).

    4. Mr Market will go up.

    5. Mr Market will go down.

    6. Don't invest any cash that you *might* need within 5 years. Invest for the long haul.

    7. Build a portfolio of dividend payers that can augment your retirement income many years from now. Even if they go down in the short term, they should keep on paying you $$.

    8. Keep right, pass left, not the other way around. This isn't the UK.

  • Report this Comment On December 11, 2008, at 10:59 PM, redneckdemon wrote:

    Ecoloney: Bravo, and thank you for that.

    Folks: I didn't see anything up there saying that NOW is a perfect time to buy stocks. I saw a listin gof several stocks offering better returns than T-bills.

    Honestly, I don't understand why everyone is shouting about how dumb it is to be in the market right now. Looking around, I can find several comapnies who are still turning in positive returns, even with the over-all index at negative 20% or more. A good idea might be to keep your cash away from poorly run companies, to be sure. I would also avoid the wall-street favorites, since people are selling without rhyme or reason.

    As for the strength of the US Dollar, sure, it is up. Thats cause people are loath to part with their cash right now, beyond essentials and paying off their debt. I sure as hell don't blame them for that. But just as soon as the economy starts moving again, all this cash the treasury is pumping out is going ot catch up to us, and the dollar is going to plunge. Short term, can't fault you. More than a month or two, not a chance. I'll be buying gold while the dollar is strong, and looking for bargains in the market. If it is a good company, you might be down a bit, but not for long.

    Once the market is done being stupid, the returns on money smartly spent are going to trump just about every other investment out there.

    In the mean time, I'm going to keep living below my means, so that I don't need to take on self-destructive debt, and will have plenty of money to invest when I spot a great opportunity. I don't care if others are fearful or greedy. I think both are the default states of being for the human race. But I do believe the market can be relied upon to do two things: go up, and fall down. Money will be made either way.

  • Report this Comment On December 11, 2008, at 11:15 PM, GoNuke wrote:

    fe3lixallen

    The Canadian dollar has upside potential in part because it has recently fallen so much yet Canada's fundamentals are stronger than those of the US.

    Furthermore Canada is likely to benefit as much from any US fiscal stimulus plan as the US is because the two economies are so closely tied.

    Canadian credit markets are quite liquid so any fiscal stimulus will be amplified by leverage -consumer debt is still readily available in Canada.

    Ordinarily the value of a currency reflects the return on investment in that currency. People buy US dollars to buy US goods and services or to invest in US securities or to earn interest on US paper. Right now it is global fear that is sustaining demand for the US dollar. T-bills pay no interest, foreigners have stopped buying US goods and services, and people are afraid to invest in US stock. Why invest in good companies that could still fall victim to the credit crunch?

    All the pillars that usually support a currency's value are absent with respect to the US dollar.

    Once people come to believe that their economies have hit bottom (and the risk of further losses is remote) holders of T-bills will shift their capital elsewhere. The US dollar will fall in value. To finance the nations burgeoning debt US interest rates will rise. This will make US stocks less attractive -capital will leave the stock market. If it leaves the country it will push the value of the US dollar down further leading to greater interest rate increases.

  • Report this Comment On December 11, 2008, at 11:44 PM, 50Ozi wrote:

    What about 401(k)'s, where the only fund making money this year, 7+%, has been the Lehman Treasury Index emulator fund?

  • Report this Comment On December 12, 2008, at 12:02 PM, jrj90620 wrote:

    Buy Canadian natural resource stocks and double benefit for Americans when the commodities soar as a result of the U.S. Dollar crashing.When the U.S. Dollar goes into freefall who will bail us out?No one.

  • Report this Comment On December 12, 2008, at 2:28 PM, 181736065 wrote:

    GoNuke,

    I agree with you regarding the US Dollar. I think it is a phony rally. Perhaps not soon, but we will most likely eventually see inflationary pressure and a decline in the US Dollar.

    50Ozi,

    You are right. In fact, since the dollar has streghened, your world-wide wealth has INCREASED by an additional 10-30%.

    The best investment this year? - CDs, T-Bills or Money Market funds. Not stocks.

  • Report this Comment On December 14, 2008, at 11:19 AM, dmcnic wrote:

    Let's say you're the manager of a large fund and you've just made a sizable purchase of oil futures. You have decided to hold a pile of cash as collateral in case of a margin call. The alternative would be to sell another asset potentially at a sizable loss if that margin call happens. Suddenly buying near zero maturity t-bills with that cash even at a small loss seems like good risk management to me.

    If we have to be respectful regarding our comments, you should also be respectful of the risk managers who know the alternative is worse.

  • Report this Comment On December 17, 2008, at 11:09 AM, winomaster wrote:

    "I am having a hard time understanding why anyone would prefer to loan their money at negative interest."

    It's actually better than keeping it in your matress. Your house could burn down and no insurance company will reimburse you for the pile of cash that went up in flames. Whatever you do with that cash involves some risk. The loss on T bills is the cost of insurance.

  • Report this Comment On December 17, 2008, at 11:18 AM, winomaster wrote:

    "The Canadian dollar has already fallen 25% against the US dollar yet the Canadian economy is closely tied to the US economy. When the world shakes off this recession Chinese and US demand for Canadian resources will push the Canadian dollar back up. The Canadian dollar has little downside and lots of upside. The US dollar has NO upside and lots of downside. Plus US T-bills offer no income."

    Smart post. But that won't happen overnight. I'm thinking it might work better if the money was put into Canadian natural resource stocks that will also be rebounding smartly when this is over.

  • Report this Comment On December 18, 2008, at 12:02 PM, melo0101 wrote:

    hello everyone, stop being greedy. isn't that the problem that got us to where we are today. sure you can go to other markets, or even move to another country. greed is wanting too much. people are suffering and even dying, while people are interested in their returns on investments. a planet at peace, people living healthy can be made, just like this economy was made. pulling out money of the us and into foriegn markets is a smart investment, but the smarter investment is in humanity. peace and love.

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