The action over the last week or so has been within the US Treasury market. Finally it seems to be behaving as we would have expected it. So far the US Treasury has had little trouble in attracting investors (sheep) for its record debt auctions to fund the government’s spending binge. Foreign dollar holders continue to do their best to support their own currencies by supporting the dollar by purchasing some 45% of approximately $1.9tn in US notes and bonds this year, up from 29% a year ago. How the US has managed to con foreigners in to keep funding its living beyond its means is beyond us – they must be marketing geniuses!
The continued support by foreigners and the purchases of its own debt has allowed the treasury to keep a lid on its borrowing costs. That will become increasingly difficult as trillions worth of additional debt is forced into the market at the same time the bubble now forming in short term debt starts maturing and needs to be refinanced. Interest rates on Treasury debt will have to rise and substantially so in order to attract new buyers!
This rise in interest rates will mark the point of no return. The US is now in a very prone position because it is unable to withstand higher interest rates. When it collapses under the weight of its massive debt, the dollar will crash and hyperinflation will result. Being short US Treasuries now is perhaps the trade of the decade!
What impact will a crash in US Treasuries have on equities, commodities, real estate, and the USD? Watch the market it will tell you all about it when it is good and ready, perhaps it is already telling us!
Disclosure: Long DJP VTI TBT UDN IYR