The last time treasury bonds yielded such a pitiful return as they do now Elvis Presley was singing “Heartbreak Hotel” and President Dwight Eisenhower beat Adlai Stevenson for a second term in office. The year was 1956 and the average ten-year bond brought 3.02% on economic gains of 1.8%, consumer price gains of 3% and unemployment of 4.1%. Comparatively, the United States expanded during the third quarter of 2010 at a 2.6% pace while inflation remained stubbornly lodged at almost 10%.

Investors often flock to treasury notes when the stock market gets scary. Treasury interest rates have been all over the place in recent years. 2008 saw average returns of 14%, which plunged to a 3.72% loss last year. According to a Bloomberg survey, 2010 has averaged 3.2%, placing it slightly ahead of the 1956 pace.

In spite of the low yields, the Federal Reserve continues to implement Quantitative Easing 2 (QE2), a massive treasury purchasing program expected to continue through June of 2011, in hopes that it will stabilize and invigorate the economy. Wall Street loves QE2 because of an institutional belief that it will keep inflation at bay a while longer.

The problem we see with treasuries in general, from an investor’s viewpoint, is that a return of 3 – 4% on your money doesn’t even keep up with the rate of inflation right now, even if you accept the government’s number of around 4% as God’s truth. It’s very simple. Inflation is at 4%, as is your treasury bond “investment.” End result, you are spinning your wheels financially and have not contributed a solitary bit to your overall net worth, in real terms. Even worse, the real inflation number is likely much higher, maybe close to 10% once everything is factored in, which means you’re bailing water from a sinking ship with a leaky cup.

The point here is not to scare you out of treasury investments but to educate you out of the faulty thinking that this is a safe, conservative method to increase your personal portion of the economic pie. You’re not increasing anything. Not when milk has soared to nearly four bucks a gallon and food prices all over your local grocery store are not creeping but leaping ever higher.

Did we happen to mention that the government leaves out food prices to arrive at the “official” inflation number? Strange how that happens.

The American Monetary Association Team

Flickr / Luiz Fernand0 / Sonia Maria