T-Bonds Get T-Boned

Long-term treasuries are getting t-boned.

But the Fed doesn't know the cause of the accident. As Reuters writes:

The Federal Reserve is studying significant moves in the U.S. government bond market last week that could have big implications for the central bank's strategy to combat the country's recession.

But the Fed is not really sure what is driving the sharp rise in long-dated bond yields, and especially a widening gap between short and long term yields.

The rise in long-term treasury rates (the increased interest the government has to pay investors to entice them into buying them) is driving up mortgage rates, and will have many detrimental effects on the economy.

So it is important to figure out whether the increase in long-term treasury rates is temporary or longer-term.

Of course, everyone knows that China - the biggest purchaser of Treasury bonds - has shifted from long-term treasuries and into short-term T-bills of 3 years or less. (See this and this).

As the Reuters article notes:

Another possibility is that China, the largest foreign holder of U.S. Treasury debt, has decided to refocus its portfolio by leaning more heavily on shorter-term maturities.

Is China likely to shift back into 30-years?

Geithner's hat-in-hand trip to China was likely largely an exercising in requesting exactly that.

But given America's solvency problems and the fact that Bernanke is printing money like the dictator of Zimbabwe, I am not very confident that China will shift back to long-term Treasuries in the foreseeable future.

Note: Given the amount of behind-the-scenes financial shenanigans which are going on, it is possible that Ben, Tim and the boys will be able to drive down long-term rates using some cunning and devious (and no doubt fraudulent) method. For example (no inside knowledge, just speculating here) some of the trillions in bailout money could get funneled to Goldman Sachs on the condition that it be used to buy long-term Treasuries. Then the Feds could pretend they are not buying their own long-term Treasuries and monetizing the debt, and rates could miraculously go back down. Just guessing . . .

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