What Does This Mean?

I've been watching the T-bond rate for months now, as it decends to impossibly low interest rates.  From highs of over 15% APR in the early '80s, it has dropped to just over 1.5% APR as of Friday.

This is an absolutely incredibly low interest rate.  These interest rates are set by auction; by definition this means that there are plenty of borrowers (the buyers of the bonds) willing to lend the U.S. billions of dollars at these absurdly low rates.  If 1.5% doesn't really mean that much to me, here's another way to look at it: would you lend the U.S. government $1,000 for ten years, in exchange for $15 a year?  That's exactly what thousands of willing lenders, lending an aggregate of many tens of billions of dollars, are doing.

What on earth is wrong with these people?  Why would they do such a thing?  It especially seems to fly in the face of reason when you see the size (and rate of increase) of the U.S. debt, nicely shown on the graph at right.  In this sort of situation, one might reasonably expect to see inflation – which would make you very reluctant indeed to lend money at such low rates.

I've read dozens of articles claiming to explain this phenomenon.  They all boil down to some combination of two things:

– U.S. Treasury Bonds are the least bad place to park your money right now (in other words, the most likely place to give you your money back).  Because of that, it's a seller's market – lenders trip over each other competing for the chance to buy T-bonds.  The problem I have with this explanation is that 1.5% APR is hardly any better than stuffing money in my mattress.  I don't find this argument particularly persuasive.

– the smart lenders are persuaded there is almost no risk of inflation in the U.S., because of the success of the Fed in managing it.  This is so implausible that I simply cannot believe even the stupid money would believe it, much less the smart money.

So I am left completely puzzled by this phenomenon.  Any of my readers have any ideas?