Another Bubble?

US treasury bonds, notes and bills are traditionally considered a safe heaven in turbulent times. The US government is simply promising to pay you back in US dollars. As today’s money is fractional-fiat money the government can print as much as they want of their own currency. That is yes very likely they will pay back the notional plus interest rates, but what you will get back is simply USD fractional-Fiat money.

The traditional buyers of US government bonds have been nations with big trade surpluses, China, Japan and series of oil exporting countries.

Major holders of US treasury securities

Most of these countries are also hit hard by the recession. Their appetite for keep buying more US government bonds are falling rapidly. What has helped the US treasury bond/note market recently is investors flight from even more risky securities, selling out of stocks and redemptions from risky investment funds etc, putting their money in what they think is a safe heaven (and hopefully it is), US treasury bonds, notes and bills.

If the big buyers are loosing their appetite for US treasury bonds it is at some point a danger for a massive sell. One of the few potential massive buyer I can see that would be willing to keep the price of treasury bonds up, to keep long rates down, is the FED. To buy treasury bonds I guess they simply could increase the speed of the electronic printing press. This again increases the danger of a dramatic fall in the dollar and/or in the long run that deflation spills over in massive inflation. When talking about a fall in the dollar we must be careful, a fall against what? Several smaller nations are actually even worse off than USA. Countries with massive debt in a foreign currency do not even have the possibility to pay back their debt by simply turning on the printing press (and by this exporting some of their debt burden to others), we have already seen what happened to Iceland, and several other countries are now on the brink of a “bankruptcy” due to massive debt in foreign currencies.

I do not know what will happen, but what normally is considered a safe haven looks very risky to me. The risk relative to return seems to be out of line.

We will see! I hope I am wrong.

Be sure you know what you do if you want to put on a leveraged bet's against potential bubbles. Bubbles can often stay irrational longer than you can stay solvent.

PS: People that have read ancient books on a topic closely related to finance will possibly understand what the attached picture illustrate, others will not.