Category: Treasury bonds

The next bubble?

We nominate the debt of the U.S. government. The case against the long bond is clear:

  1. The U.S. government is taking on massive (possibly measured in the trillions of dollars) liabilities with the bailout of Wall Street, the banking system, and the GSEs for their role in helping foment a housing/consumption/credit/speculative bubble for the ages. (This in addition to the ticking time bombs of Medicare, Social Security, and the more recent prescription drug promise.)
  2. The U.S. government is broke. The U.S. taxpayer is crying “uncle” as the U.S. consumer is tapped out. This spells D-E-F-A-U-L-T, unless…
  3. … Fed chairman Bernanke fires up the printing press, in which case the hapless bondholder gets destroyed.
  4. Under this dire scenario – a lose-lose for Uncle Sam’s creditors – the 30-year Treasury bond is yielding all of 4.11%, its lowest level since the 1960s.

We’ll defer to our good friend, Tony Deden, who adroitly manages the Edelweiss Fund from his perch in Zurich:

I ask you, would you lend money to the world’s greatest debtor for a period of ten years at 3.7% – nearly 2% below the official (and understated) rate of price inflation? I would not. No sensible person would think of it. Yet this is the price of the U.S. government’s ten-year bonds. It earns our award of the mispriced asset of the new century. ~ Monthly Review, September 3, 2008

Of course, let’s not forget the 10-year Japanese government bond yielding all of 1.5%.

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