hmmm...somethings up, page-59

So, now we all know that, post Citi's pseudo-bankruptcy, the T-Bond started responding to Bernanke's quantitative easing (either threatened or real). And, boy! It's really gone off. Up $10 in 2 weeks. Remember, the financial crisis started in August 07. Look at the peaks on the chart which we'd previously considered to be huge spikes, until the past month. Starting from mid-November, we've seen a quite unnatural move. Reeks of official intervention. Ben only appeared before Congress at the beginning of this week and kinda hinted that the Fed might/might-not/might-not-yet intervene across the yield curve. I think he's actually been doing it for a few weeks.



So, what happens when the market gets wind of this policy? Well, the hedge funds try and front-run the Fed, by buying up treasuries as fast as they can. However, the biggest holders, being foreign central banks, start selling with their ears pinned back! They've been looking for some means to escape from the trap of having the majority of their reserves tied up in one place. Now, the Fed has essentially said that it intends to monetize sufficient of this debt to keep interest rates low and force them even lower. In other words, the Fed has just told the Chinese, Japanese and others that they will (for a limited time only!) have a very big buyer of all treasuries on offer.

If the Chinese and Japanese are smart, they will take the hint and start selling with their ears pinned back, forcing the Fed to monetize faster and faster and faster!

What the Fed is counting on is China's recently announced policy of depreciating the Yuan. That means they will be buying more US dollars than they have been recently. If they are doing this, they have to put the dollars they buy to some use. Will they keep on buying treasuries? Will they buy other US assets (eg. strategic stakes in companies)? The latter is political dynamite.

No announcements from Japan about intervening to lower the value of the Yen. Will they take this opportunity to sell treasuries and allow the Yen to appreciate further? Unknown. Certainly, virtually every other creditor nation (eg. South Korea, Taiwan, etc.) can now sell every US treasury they own at premium prices. Will they?

If the Chinese and Japanese pass up this unique opporunity and keep on doing the same old thing, then Hermes strategy (discussed in another thread) of investing in T-Bonds will pay off handsomely, because both the US dollar will stay strong and Heli Ben, the hedge funds and the Chinese will be buying treasuries.

The Fed has announced what they'll do. We know what the hedge funds will do. The question becomes, at what point does the yield on treasuries get so, ridiculously low that the Asian central banks think enough is enough?

Take a look at the yields on offer here. They're already so low, how much further can they go?



Whoever thought you'd see US interest rates across the curve at the level of Japanese rates? Not me.

This is really getting interesting now!