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Treasurys may be over-valued but here is why they could sustain for "an extended period"

Treasury's are not a bubble  ..Because the demand for which can continue to be sustained. Not that this demand is indicative of a healthy economy but the three pillars of demand I talk about below can be sustained for a "while".

There are 3  Pillars for US government treasury demand.

1. Foreign demand which is tied to our $$ status as a reserve currency ..Because oil is sold priced in dollars.  This creates $ demand. Oil will be needed for some time.  % of Petro $ recycled back into treasury and % of dollars held (as Us treasury bonds) by foreign governments to pay oil bills is variable....But in a sea of fiat currency's the $ while being diversified is not abandoned by foreign governments. There is a Pillar of demand here

2. FED QE   This is the second pillar of demand which has helped keep rates low. Investors often "front run" the feds "mood" in regard to treasury purchases when rates are low and the fed still announces they will continue to keep the music playing. This sends a message there is more $$$ to be made by investors (I.e. the fed is a buyer of last resort). Regardless of a debate on that point... the fed's outright purchases are a source of demand.  The fed could continue to grow it's balance sheet and purchases in these instrument for "an extended time".

3. FED/PRIMARY DEALER  "stealth monetization"  Big banks borrow from the fed at very low rates and lend to us gov't thru purchases of treasury debt...The amount of treasury's purchased this year by broker/dealers has risen exponentially.   This type of monetary "circle jerk" can continue and finance large amount of the deficit/debt. 

(1B?)  Tied to the first pillar of treasury demand may in fact be our military presence and at least the threat of a "presence" should country's balk at any implied deal (OPEC) pricing oil in dollars or recycling a certain amount of petro dollars. This is the most speculative by far, but in a world where out military is clearly the largest ...it seems to me this would be reasonable to argue this plays a part at least in enforcing our world reserve currency status,which feeds into demand indirectly.

Lastly and quite importantly is the NEED to keep RATES LOW.....assets that many believe are over-valued rarely (NEED) to be kept this way....but treasury's may be one area.  US govt need to keep interest payments on the debt low  and the leveraged US financial system (sans rapidly rising asset values) needs to keep interest rates from rising as well. it seems to me assets that NEED to stay somewhere  can for very long periods....often at the expense of other things...namely gov't demand for debt crowding out the private sector.



Disclosure: "no positions" currently