What's behind the long secular bull market in U.S. Treasuries?
I believe that it's largely irrational, fueled largely by foreign investors that are afraid to invest anywhere else. There are a few people out there right now who are writing about this: http://www.marketwatch.com/story/us-treasuries-largest-bubble-in-world-history-says-nia-2011-08-30 http://articles.businessinsider.com/2010-08-25/markets/30080511_1_fed-first-yields-mbs As to why would you invest in long-dated versus short? Probably to chase yield. The 30 year yields 30x more than the 1 year. It's also easier to buy on the long end if you believe that the economy will remain slow for another decade or two and therefore the central banks will keep rates low for a very long time. Of course, at the moment, long-dated treasury prices are artificially high because of operation twist. In a secular bull market, strong investor sentiment drives prices higher, as participants, over time, are net buyers. Secular markets are typically driven by large-scale national and   worldwide events... demographic/ population shifts,   governmental policies... bear market periods occur within   the longer interval, but do not reverse the trend. There are still many reasons to buy the long bond, despite the lack of yield (nearly flat term structure of interest rates). Despite the recent credit ratings agency downgrades of U.S. sovereign risk, the T-bond offers greater relative security than many alternatives.  If Germany were NOT part of the EU, its government bonds would be issued by the Bundesbank, denominated in Deutsche Marks. German government bonds would probably be a better choice than the U.S. Treasury's 30-year bond.  Long-term maturity U.S. Treasuries are in demand by investment and portfolio managers because:
Risk is the problem, as others have pointed out. Your fixed mortgage interest rate is for a set period of time only. Let's say your 3% might be good for five years, because that's typical of fixed-rate mortages in Canada. So, what happens in five years if your investment has dropped 50% due to a prolonged bear market, and interest rates have since moved up from 3% to 8%? Your investment would be underwater, and you wouldn't have enough to pay off the loan and exit the failed strategy. Rather, you might just be stuck with renewing the mortage at a rate that makes the strategy far less attractive, being more likely to lose money in the long run than to earn any. Leverage, or borrowing to invest, amplifies your risk considerably. If you invest your own money in the market, you might lose what you started with, but if you borrow to invest, you might lose much more than you started with. There's also one very specific issue with the example investment you've proposed: You would be borrowing Canadian dollars but investing in an index fund of U.S.-based companies that trade in U.S. dollars. Even if the index has positive returns in U.S. dollar terms, you might end up losing money if the Canadian dollar strengthens vs. the U.S. dollar. It has happened before, multiple times. So, while this strategy has worked wonderfully in the past, it has also failed disastrously in the past. Unless you have a crystal ball, you need to be aware of the various risks and weigh them vs. the potential rewards. There is no free lunch. "So it seems like a lot of people here aren't exactly sure about why this works and its financial implications.   So what you are referring to is in Finance something called Funds Transfer Pricing or FTP (often referred to as just Transfer Pricing). Like anything else, FTP has its place. Most companies; however, don't use it properly. FTP, theoretically, has one primary purpose (although it's developed a second): to properly allocate opportunity costs across divisions.  Let's say Company A produces widgets. They sell these widgets for $200 at a TOTAL COST of $150 and book profits of $50. Now to produce the widget Division 1 makes a computer chip at a cost of $50 that it then ""sells"" to Division 2 for $60. Division 1 then books a profit of $10. Division 2 then makes some plastic stuff and assembles the device. This is labor intensive so Division 2's costs are $100. Company A sells the completed device for $150. Division 2 subsequently books profits of $40, and appears much more profitable than Division 1, on the surface.  The problem arises when Division 1 could sell the chip to the open market for $125. Now it costs them $50 to produce, and they could make a theoretical profit of $75. This is MORE than the company makes AS A WHOLE on the entire device. By having Division 2 pay effectively ""fair market price"" for that chip, you realize that Division 2 is really operating at a loss (the *opportunity cost* of not selling the chip to market is greater than producing the completed device). Company A would be better off getting rid of Division 2 and solely focusing on Division 1. In a good FTP system, Division 2 would pay the fair market price of $125. If done properly, management would  hopefully realize it should divest Division 2.  That's the ***fundamental premise*** behind FTP. In actuality things get much more complicated because of economics, the company itself, branding, IT, operations, management, PPE, labor laws, etc. Thats why most companies screw it up. All that other stuff falls under whats called cost allocation accounting. It gets VERY complex and entire masters courses are dedicated to it (different methods, etc.)   The other thing you can do with FTP is get crazy tax breaks due to various tax laws. The simplified explanation is that divisions pay taxes on profits to the government ***that division*** is located in (this works on the state level, too btw.). GE does a lot of this and it's a big part of why they pay almost no-taxes. Again, it gets more complicated when you involve audits as there's some grey area legally.   For simplicity, assume tax rates are 40% in the US and 10% in India. So let's say GE makes an airplane engine in the US but ""finishes"" manufacturing in India. These specific engines costs $5,000,000 for the US division to make, up to a certain point.  The US division can then sell the engine at a break even to India. So India ""pays"" $5,000,000 for the engine. The US division then books no profit. India finishes the manufacturing with additional costs of $1,000,000. The India division then sells the engine to the open market for $9,000,000 . Therefore, the India division books a profit of $3,000,000 and pays taxes of $300,000. Now GE as a whole makes a profit of $3,000,000 less taxes of $300,000 = net profit of $2,700,00.  Further, let's say the fair market value of the engine, as is, when the US sells to India is $7,000,000. That would mean US ***should*** book profits of $2,000,000 and India ***should*** book profits of $1,000,000. Total taxes by GE are now $800,000 (US) + $100,000 (India) = $900,000. However, what's important is that NET PROFIT is now $2,100,000. ***GE just saved $600,000 in taxes by doing this***. The beauty of this is, divisions are supposed to charge fair market value for products FTP'd internationally; however, it's REALLY hard for the IRS to say what the value of an unfinished product really is (heck, you could be offering bulk discounts, etc.)...  The fact is, often, US divisions have skilled labor that is difficult to replicate elsewhere. They just show US divisions operating at losses to make the company as a whole better. The problem, again, arises when top management don't fully appreciate or understand the reasoning behind this stuff. They end up making cuts to US labor because it's ""unprofitable"" without thinking about the entire story.   I know this is very long winded but hope it helps!  ***tldr; companies FTP to recognizes profitability and opportunity costs of divisions as well as use it for overseas tax breaks.***  Side note: Politically speaking, people who know how this works are pissed off about it in the U.S. (don't worry though, most politicians on both sides don't have a clue). We have high corporate tax rates relative to other countries and IRS loopholes allow this kind of thing (lobbying $$). It's also why, economically, you can't just raise ***corporate*** tax rates to increase domestic tax reciepts as more companies will just implement this process (it's complicated to do properly). Also, please don't say 50 years ago tax rates were higher and raising taxes increased receipts. The fact is most companies couldn't even FATHOM doing this 50 years ago, no less even 20.  edit: some clarification in wording" "Wikipedia has a solid article on Money Market Funds which includes a section on ""Breaking the Buck"" when the money market fund fails to return its full dollar.  Money market funds smoothing out the daily (generally small) fluctuations of investing in short-term treasuries directly but have similar risk over longer periods.  Some funds can and have lost money in market crashes, though even the worst performers still returned 95+ cents on the dollar. While few investments are guaranteed and likely none in your retirement account,  money-market funds are likely the choice you have with the least fluctuation and similar minimal risk to short term treasuries. However, a second important risk to consider is inflation.  Money market funds generally have returns similar or less than the inflation rate.  While money markets funds help you avoid the fluctuations of the stock market the value of your retirement account falls behind the cost of goods over time.  Unless the investor is fairly old most financial professionals would recommend only a small portion of a retirement account be in money market instruments.  Vanguard also has a set of target retirement investment funds that are close to what many professionals would recommend.  Consulting a financial professional to discuss your particular needs is a good option as well." Opioids have become a scourge of our society.  Even more interesting is the story behind the [Sackler Family](https://en.wikipedia.org/wiki/Mortimer_Sackler), who in many ways singlehandedly foisted this problem upon the U.S. and in the process became what might be characterized as the wealthiest legal drug lord family in the world. "&gt;If mounting debt is such an issue, why do all the markets act as though the US is perfectly solvent?   They don't. China, Russia and most emerging markets are selling U.S. treasuries faster and faster. They have started doing so a couple years ago and are doing so at a higher pace now. They sold record numbers of U.S. treasuries in June. Many countries are forging trade partnerships with each other to get away from U.S. debt and even the U.N. and IMF are calling for an end to the dollar as the global reserve currency because it no longer deserves that status, largely due to increasing debt. By the way, the Fed is owning a larger and larger portion of U.S. debt these days.  &gt;Why is our interest rate so low, and why do investors around the world continue buying Treasury bonds?   The federal reserve keeps rates low. Investors speculate about the future of the market all the time, but they are starting to dump them now http://www.bloomberg.com/news/2014-08-15/u-s-investment-outflow-reaches-record-as-china-sells-treasuries.html http://www.reuters.com/article/2014/08/15/usa-economy-capital-idUSL2N0QL0T520140815  http://www.ft.com/intl/cms/s/0/eaccbe18-aea6-11e3-aaa6-00144feab7de.html  &gt;The total net outflow of long-term U.S. securities and short-term funds such as bank transfers was $153.5 billion, after an inflow of $33.1 billion the previous month, the Treasury Department said in a report today. The June figure, and $40.8 billion in net selling of Treasury bonds and notes by private investors in June, **were the largest on record, the Treasury said.**  &gt;""This is a disappointment and is a negative for the dollar. Clearly, the United States is having a hard time attracting investments to offset its current account deficit,"" said Michael Woolfolk, global market strategist at BNY Mellon in New York.  &gt;Central banks sold US Treasury debt at the start of the year, according to the latest official data released on Tuesday, as stress among emerging market countries intensified. Declines in Treasury holdings were seen for Thailand, Turkey and the Philippines, which sold $3.9bn, $3.3bn and $1.5bn respectively during January.   Wow look at that. Did you just dismiss all evidence that proves you wrong? I think so!" The market moves faster than ratings agencies.  Everyday the market is trying to figure out the true value of Assets - Liabilities and thus its overall equity value.  The financial crisis illustrated this perfectly when Bear Sterns got stuck in a liquidity trap.  It's MBS(CDO) was still highly rated, likewise its overall credit rating was sound, however in reality the value of assets were much higher due to coming default, credit providers realized assets Bear had posted as collateral were falling in value quickly.  This started the death spiral, or feedback loop in which it isn't clear if the tail wagged the dog or the dog wagged the tail, but as equity value fell Bear could no longer get access to credit markets to fund daily operations, once it got margin called and couldn't pay, it was all over.  When it was sold to JPM, they basically stole the entire company at a fire sale price, everyone knew they were getting a deal, as reflected in the post buyout price jump of JPM stock.    So in a technical sense you are right, they have nothing to do with each other.  But in a practical sense as we see equity value collapse we are approaching bankruptcy, and thus default, and credit ratings should represent likelihood of default so the two should have a positive correlation to one another, assuming equity value is the 'true value'. No idea.   I dont know what rules were put in place after 2008 in regards to rating them.  IIRC the institution doesnt have the ability to choose moodys or standard and poors. The cdos are submitted to both of them and rated anonymously. But i have no idea where im getting that from. "Those are the ""right"" yields. They are historically (but not ""nonsensically"") low. Those yields are reflective of the sluggish U.S. and global economic activity of the past decade. If global growth were higher, the yields would be higher. The period most nearly comparable to the past 10 years in U.S. and world history was the depressed 1930s. (I am the author of this 2004 book that predicted a stock market crash (which occurred in 2008), and the modern 1930s, but I was wrong in my assumption that the modern 1930s would involve another depression rather than 'slow growth.')"