The stimulus will pop this treasury bubble
Treasuries are in bubble mode, investors were snapping them up like subprime mortgages in 2007 after the credit crunch began. The once safe flee to US dollars will come with a price, near zero returns and worries about the US government’s own credit standing as it faces trillion dollar deficits.
In order to pop the treasury bubble the stimulus must be borrowed money. The original goal was to borrow every last dime of the stimulus amount however there is a possibility that some of the debt will have to be monetized by the federal reserve. The amount borrowed will have to go to the Treasury markets, likely in 20 and 30 year Treasuries in order to lock in the obscenely low interest rates.
At present there is plenty of selling pressure for long term treasuries as China has been selling off their long term holdings and buying short term treasuries. This step was taken for a variety of reasons, first it frees up China’s holdings from long locked in periods and also allows the possibility of quick withdrawal. But above that, why would you ever lock in your investment at these rates? The returns are simply terrible.
When the $800+ Billion stimulus ultimately hits the treasury markets its impact will be huge. The expansion of US debt, likely to foreign owners, will grow the current foreign holdings of US debt by 20% overnight.
Longer term treasuries are likely to feel the pinch first and then short term rates will follow as some investors leverage up on the time to generate higher returns.
Right now I’d be stocking up on TBT, which has already had an excellent run in 2009 and will surely continue as this debt will have to be sold on the open treasury markets.
One worry with this stimulus package is that the repercussions through the market could be huge. The United States may inevitably be forced to raise rates not to fight inflation but instead to keep foreign money here. If the rest of the world figures out how incredibly indebted the American government already is this treasury issue will be tough to finance.
