Monday, May 09, 2011

A Good Time To Buy Treasuries

When is it a good idea to buy short-term Treasuries paying 0.25%? When everything else is uncertain, that's when.

Greece is doomed to default, err, restructure. They are now paying credit card interest rates on their ever-increasing debt.

This is what it looks like when people decide you aren't going to pay them back. Source.

When that happens, banks all over Europe are going to suffer major losses to the tune of tens of billions. Some might even fall. Who has exposure to that? Who has exposure to the exposure?

Hypothetical scenario with company names and amounts pulled out of the air: Say you manage a big mutual fund and you invest in Caterpillar. They've got their pensions invested in Wells Fargo. Wells Fargo has huge loans to Deutschebank. Deutschebank has $8B in loans to Greece. Greece decides to blow off it's creditors, err, restructure it's loans and Deutschebank takes a mortal blow. Wells Fargo's loans are now worthless. Caterpillar's pensions take a huge hit because Wells Fargo's stock tanks. Your investment in Caterpillar is now deeply underwater because they were caught up in the chain reaction of Greece's collapse.

Is that scenario real? Who knows? How many linkages do you have to trace to figure out whether or not you're exposed to the Eurosocialist implosion? Instead of sitting out there waiting to get killed, it would be a better thing to park your $$ somewhere safe and sit it out. It won't take long for the whole thing to blow over, probably 6 months or so. One place you can be reasonably assured of holding on to most of your value is buying short-term Treasuries. Since you're not going to be in them that long, their appalling rate of return isn't a big deal. There's no worry about price, either, since there's a never-ending supply of the things.

Best to park your cash for a little while and once the dust clears you can sell them (or not roll them over) and get back into the market.

There. That was just a little thinking out loud as I wandered through my normal morning reading. I'm not doing this with my money nor do some of the giants like PIMCO seem to be doing it. It's only a little thought exercise to try to understand how things work. Or not. :-)

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