Head, meet Desk

Articles like this make me want to crater my own skull.  The following two opening paragraphs represent some of the most shamelessly ignorant financial reporting I've ever seen in my life.

At a time when savers complain that they are earning almost no interest from their bank accounts, some investors on Monday bought United States government bonds that effectively had a negative rate of return.

Bizarre as it sounds, that is correct. In an auction of a special kind of five-year Treasury bond, investors paid $105.50 for every $100 of bonds the government sold — agreeing to pay the government for the privilege of lending it money.

What the Times is nominally suggesting here is that investors are purposefully buying into 5-year securities that ultimately represent a loss of money at the conclusion of the 5 year term.  It's not ambiguous.  "Negative rate of return."  It's also retarded and/or deceptive.  It's Finance 101 retarded.  Here's what's really happening:

Fixed income products, such as bonds and Treasury notes, have a fixed coupon rate of return.  A 3% bond pays out 3% of its principal face value yearly, representing a 3% annual return.  Annual.  Got that?  Ok, so when you buy these notes, they're most commonly on a secondary market where other investors can bid the note up or down.  Appealing investments often sell at a premium above the face value of the note.  Unappealing investments sell at a discount.  This is normal.

NYT is citing notes being purchased at $105.50, which is a 5.5% premium.  We'll get into the reason for the premium later, just note that that buy-in premium is a one-time deal.  So you buy $100 worth of note at $105.50.  Let's say it's a 2.75% 5-year note.

Day 0: Paid 105.5, own 100:  5.5% loss
Year 1: Paid 105.5, own 100 note and $2.75 in interest (total 102.75):  2.75% loss
Year 2: Paid 105.5, own 100 note and $5.50 in interest (total 105.5): Even Steven.

YOU STILL HAVE THREE YEARS OF INTEREST COMING AT YOUR DUMB FUCKING FACE CHRISTINE HAUSER

You're not "agreeing to pay the government for the privilege of lending it money" because you're still coming out in the green at the end of the term.  You're only experiencing a negative return at the moment of purchase, a 1-time cost, which is totally mitigated (at current TIPS rates) in the middle of the third year.

The article also does a woefully inadequate job of explaining this "special" Treasury security and why it would be selling at a premium in the current economic climate.  Specifically it's about Inflation-Protected securities issued by the Treasury, or TIPS.  The principal value (the $100 in the previous example) is tied to the CPI inflation bundle and adjusted up yearly if there's been inflation, so your coupon rate (currently something like 2.375% for these 5-year TIPS) is fixed but is multiplied against an ever-increasing principal value, so your interest payments increase.  TIPS are a zero-risk hedge against anticipated inflation, whereas other traditional fixed income products have fixed rates AND fixed principal, so their value can deflate over time.  Currently most investors and analysts are predicting both increased interest rates and increased inflation (I'll try to link charts later, but go take a look at commodity pricing in 2010, specifically corn and wheat) which makes short term investments attractive (so that you can move into longer term stuff once rates go up) and TIPS attractive.  So obviously short-term TIPS are going to sell at a premium.