Bond frenzy

The interest rates everywhere are really low, infact they are so low that most people cant earn anything. However there are a bunch of people who are giving away their money to the government effectively at a negative rate of return. There are investors out there who are buying treasury bonds that actually cost $100 for $105.5. The reason for this apparent madness is that these investors believe that the rise in inflation over the next 5 years is going to be more than the premium they have to pay and since the value of bonds rises with inflation, they will actually come out better off at the end of five years. The current inflation rate is about 1%. However these investors believe that the inflation rate is going to be 1.58% for the next 5 years. The reason for this belief is some of the signs coming out of the fed. Fed chairman Bernake is quoted to have said there would appear — all else being equal — to be a case for further action.”. Also the fact that the Fed has bought many treasury securities in the recent past and has redued the interest rates to nearly zero has many people believing that more money is going to be injected into the system, thereby increasing inflation and the value of the bonds.