[Sixstrings]

Financial markets notched up another historic milestone on Wednesday as the yield on 10-year US Treasury debt fell below 3 per cent for the first time in 50 years.

The decline in yields – to a low of 2.98 per cent – comes in response to unconventional policy measures taken by the US Federal Reserve this week aimed at pushing short-term and long-term interest rates lower.

This so-called “quantitative easing” is a strategy central banks use to fight deflation, the dreaded combination of declining growth and falling asset prices.

“It is astonishing [that yields are so low],” said Michael Chang, interest rate strategist at Credit Suisse. “The current environment is not like anything we’ve seen before. The Fed’s being very aggressive in quantitative easing, and the fall in yields is the result.”

http://www.ft.com/cms/s/0/eb677540-bbe3 ... fd18c.html

[MrBean]

Financial markets notched up another historic milestone on Wednesday as the yield on 10-year US Treasury debt fell below 3 per cent for the first time in 50 years.

The decline in yields – to a low of 2.98 per cent – comes in response to unconventional policy measures taken by the US Federal Reserve this week aimed at pushing short-term and long-term interest rates lower.

This so-called “quantitative easing” is a strategy central banks use to fight deflation, the dreaded combination of declining growth and falling asset prices.

“It is astonishing [that yields are so low],” said Michael Chang, interest rate strategist at Credit Suisse. “The current environment is not like anything we’ve seen before. The Fed’s being very aggressive in quantitative easing, and the fall in yields is the result.”

http://www.ft.com/cms/s/0/eb677540-bbe3 ... fd18c.html

Do I understand this correctly? Fed is giving away cheapest freshest money ever away in trillions, no questions asked. Most of that money goes to the black hole of Cayman Islands etc. Some money from Cayman Islands etc goes to treasury bonds, for which US taxpayers are expected to pay interest, lower and lower. Stephen Hawking has been proved correct, black holes do radiate. But they don't deflate, they only radiate some energy back from what they suck from living stars...

Now, what will Chinese and other Asian, OPEC and European investors in US debt do?

[patience]

Is the Fed buying its' own toxic waste here?

[Starvid]

Anyone else believe US government bonds are overvalued? This is imho the time to go bargain hunting for US (and other) corporate bonds. The spread is record high.

Not to mention the fact bonds have beaten stocks duting the last ten years, which have actually been the worst for stocks since the 30's. Which could of course also mean that stocks are undervalued compared to bonds.

Even before the latest fall in the equity market, which started mid- 2008, bonds have been outperforming equities for the past 10 years.

[CrudeAwakening]

Bond investors are betting on deflation, and are about to be fleeced IMO. 10 year rates at 3% appear ridiculously low. But great news for the government who will be looking to finance some pretty hefty debt in the near future.

[shortonoil]

CrudeAwaking said:

Bond investors are betting on deflation, and are about to be fleeced IMO. 10 year rates at 3% appear ridiculously low. But great news for the government who will be looking to finance some pretty hefty debt in the near future.

We are in a deflationary environment. Real interest cost on existing debt declines with inflation and increases with deflation. The government with its massive debt will be run over by a declining economy, and declining tax receipts as a consequence.

That is why they are desperately trying to re-inflate. Peak Oil will insure otherwise!


Available Energy

[patience]

The burgeoning US deficit for 2009 with a shrinking tax take for the govt will require an unprecedented sales of Treasuries. Looks to me like the current high demand for US Treasuries is flight to safety from stocks and falling commodity prices.

That looks good for selling US debt for 2009, but other things don't look so good. China has its' own financial woes to deal with, and the Saudis have taken a big haircut on their oil income. With so much debt going down the bowl at present, there is less money for financing debt-hence the Fed's liquidity trap. Pour money into banks, but none comes back out in loans. So, who has all that money to finance US debt next year?

I wonder how much of the demand for Treasury debt is being generated by the Fed buying in some manner to keep interest on the US debt at affordable low rates? If/when bond yields go up, the US debt will not be affodable any longer, and we have a BIG problem.

I hope someone who understands bonds better than I, will clear this up for me if I'm completely wrong? If I'm right, then, as shortonoil said, the US govt is close to default.

[Sixstrings]

the US govt is close to default

How close is close? As in February, like I was ruminating about in anothe thread?

[CrudeAwakening]

We are in a deflationary environment.

We have asset deflation, together with monetary inflation. But the collective psyche is risk averse and cash-hoarding, which could be characterised as deflationary.

The government with its massive debt will be run over by a declining economy, and declining tax receipts as a consequence.

That is why they are desperately trying to re-inflate. Peak Oil will insure otherwise!

How will Peak Oil stop them from inflating? Print enough money and you get inflation, eventually. Thanks to 70-odd years of Keynesian economics we have heavily indebted governments that are only too willing to borrow, even if the private sector isn't.

[CrudeAwakening]

Real interest cost on existing debt declines with inflation and increases with deflation.

What I meant was that deflationary expectations help to lower the cost of government borrowing. You are quite right that actual deflation increases the debt burden. The trick is to create one expectation, and the opposite reality.

[patience]

CrudeAwakening,

"...create one expectation, and the opposite reality."

Yes, the root of the contrarian creed. Now, it is a shell game, of double and triple crosses, so who knpws the reality? I say to opt out of the game and go to cash or hard goods, or some of both, for those of us with savings to protect.

I should trust Hanky Panky Paulson, the guy who just raided our grandchildrens' life savings, to bail out his Goldman Sucks buddies? Today, if it is paper, it is crap, and it doesn't matter to me whose name is on it. Yet we still have people buying T's like there is nothing else? T-paper.

[Tyler_JC]

The US is NOT near default.

If anyone who mattered thought we were even close to default, bond yields would be rising, not falling.

Default implies that the government would be unable to pay its debt on time. If they have the power of the printing press and the debt is priced in dollars, how could they possibly default?

Moreover, how much money do you think they would actually need to print in order to fill the hypothetical gap between demand for treasury bonds and the supply of treasury bonds?

Would it be a trillion dollars (the absolute worst case scenario)? That's about 12% of the money supply. I wouldn't call that hyperinflation.

Let's float back to reality folks.

[patience]

Bond yields are rising because of the world-class flight-to-safety from hedge fund bets, CDS's, and other "weapons of financial mass destruction", to quote Buffet. Bond yields will go up until nobody believes they are safe, and then it is game over. Germany and some other countries I can't remember off hand, have either had failed bond auctions, or cancelled auctions for fear of failure to sell anything. How long will it take to spread to the US? Well, it has. I think I read that the US had a failed auction of long bonds not long ago.

Some think that the Fed has already been drinking its' own Kool-Aid, by buying the long end financed with shorter term T's that are still selling. Bernanke said he would hold down long term band yields, and may be doing so, but it's hard for me to tell.

I'm not the only one who is thinking this way:

Failed Fiat Money Sytem headed for Inflation

I don't pretend to know how it will end up. I'm just trying to pay attention to those who seem to understand more than I do, and weighing the evidence as best I can.
edit to add: According to a chart on that thread, the Fed has ALREADY given out/committed $2.1 TRILLION, and no end in sight. It's not just about propping the bond market yet, as the thread charts show. There are black holes all over the place that the Fed and govt are pouring money into. The bond market is not the cause (yet) as I understand it, it is the "tell", of when the whole works goes POOF.

edit to add: Here's the chart of funds allocated, but not necessarily given out yet. Chart Link

[patience]

Old joke I once posted in a similiar discussion, but it applies I think.

A trucker applied to drive for a Rocky Mountain freight company, and was quizzed on his safe driving measures. He answered satisfactorily, saying to gear down when going downhill, ditch it rather than hit a car, etc., until he was presented with an impossible situation-failed brakes, broken gearshift, steep downhill with a slow moving freight train in his path. What do you do? "Well, I'd wake up Clyde, my pet monkey, cuz he ain't NEVER seen a wreck like we're gonna have!"