8.50%. The amount the Brazilian Government has to pay for initiating a 3-month loan
0.0.0%. The amount the U.S. Government has to pay for the same loan

The credit crisis proved to be a major shock for the financial markets, sending institutional investors into a strong risk-aversion mode. This was reflected directly in the Treasury market, where investors bought the safety of the debt market, while shorting risky assets such equities and commodities.

With investors rallying into the Treasury market, the yield on the government debt fell to record low levels during the credit crisis, mainly during the last quarter of 2008.

Since then, the market has gradually returned to risk-tolerance, which means that investors are looking for higher yielding assets instead of the safety assets. These days, the VIX index is returning to the pre-credit crisis levels, while equity and commodity markets are surging towards yearly highs, suggesting investors confidence is high.

It seems that risk-tolerance does not mean anything at all for the Treasury market, since the debt market has continued to trade within the same tight range over the last half of year. This was best seen in the short maturity bill market, where the market is trading close to the 0.0% benchmark level.

Right now, the U.S. government pays a 0.1% yield for a 3-month loan, while for a 12-month loan pays 0.30%.

In other words, the Government pays $5000 for every $1 million that it borrows with a 3-month maturity, which is probably one of the best deals of the last few centuries. Making the matter even more ironic is that during the prior week the yield on the 3-month bill fell into negative territory in intra-day trading, meaning that the market was willing to pay an interest rate charge to lend money to the U.S. Government.

The last time that short-term yields fell into negative territory was after Lehman’s bankruptcy, in December 2008. All this points to something being wrong at one of the two ends of the interest rate equation. Either, the Treasury market is following the wrong event – most market participants say that the Fed’s pledge to maintain low interest rates low for a long period influenced the debt market or that the equity and commodity markets are deeply overvalued.

Either way the story goes, two points are clear: the economy is recovering, thus pointing to higher yields, while the FOMC rates cannot go any lower from where they are currently standing; yet again pointing to higher yields.

Maybe the dollar will find buyers after all, as the market starts to price in global interest rate increases from most central banks, only to realize that the U.S. yields are already up there with the top end of the market, in real terms.