If you throw frogs into a pot of boiling water—they will jump out. However, if you place frogs in room temperature water and then bring it to boiling– the will get cooked. You also may need to be cold-blooded to be investing in US treasuries.
For those who have never heard of Bill Gross, he is one of the few people that can move markets when he speaks. Bill Gross is the founder and fund manager of the world’s largest bond company: PIMCO or Pacific Investment Management Company. PIMCO has been the largest private holder of US treasuries until recently. Bill Gross has been outspokenly critical of Ben Bernanke and the Federal Reserve’s Quantitative Easing programs. With QE1, the Federal Reserve exchanged bad bank debt and toxic mortgage backed securities for $1.4 trillion in newly printed cash. After QE1 ended the economy started to slump again. The Federal Reserve intervened with QE2 which exchanged $600 billion in cash for long term US bonds. Since the introduction of QE2 the Federal Reserve has been purchasing around 80% of new long term treasuries (i.e. 10 yr and 30 yr treasuries). Now that QE2 has expired, who should we expected to pick up that 80 percent?
Our once great creditors: China. Japan, and Saudi Arabia have been greatly reducing their long-term US debt exposure. Why would anyone want to own long term treasuries when the Fed is purposely employing inflationary tactics to stimulate the economy? It makes little sense to hold a 10 year treasury that yields 3% when the country’s inflation rate is at 3.6% (The government’s own CPI number). Unless, you enjoy to losing money on purpose.
Interest rates need to rise in order for more foreign and domestic investors to become attracted to US treasuries. Unfortunately, we have an economy that has been addicted to 0% interest rates for 27 straight months so any rise could be catastrophic for the housing market and the ‘Too Big to Fail’ banks.
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