Time for Treasurys

In November 2008 we started seeing Treasury Yields at Record Lows:

The way toward the 2-2.5% yield is wide open. I expect to see yields at those levels sometime in 2009/2010. The yield curve will flatten out further since there is little room left for Treasury Bill Yields to drop.

Then in mid January, with Treasury Yields in free fall, we saw yields below 2.5%. I wrote then:

It is certainly likely that yields will snap back into the corridor and have a significant short term movement upwards toward the upper end of the range over the next weeks.

This chart summarizes my recent short term predictions:


So what’s next? Well, now we are about to hit that upper end. From a technical point of view, treasury yields could hit it at around 3.3% and then resume its move toward 2%. Fundamentally, there has been a lot of talk recently about an economic recovery. This has helped boost the stock markets up for a while and sparked a sell off in safe Treasury investments.

When it becomes obvious that these hopes have been premature, the flight to safety will surely resume. An ongoing decline on the stock market will then be accompanied by falling Treasury yields from now on toward the end of the year.

A business cycle caused by credit expansion policy needs to go through the recovery phase and this recovery has to come full circle. So far this has not yet happened. There are more inflated sectors ready to implode, in particular consumer credit and commercial real estate. This will continue to affect banks all over the country. Americans, sick and tired of debt, will continue to abstain from consumption and consolidate their finances.

For anyone looking for a safe place to park their cash right now, Treasury Notes are looking pretty attractive at this point.

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China to US: We Hate You

The Chinese recently commented on their purchases of US Treasuries:

Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York that China would continue to buy Treasuries in spite of its misgivings about US finances.

We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

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