The bubble to end all bubbles?

up in the old hotel — Mon, 05 Jan 2009 16:29:40 -0800

The cover of a major financial publication warns: If you're holding U.S. Treasuries, GET OUT NOW! As has been noted previously, investors have headed for the financial equivalent of a bomb shelter -- U.S. Treasury bills and notes -- triggering an epic rise in prices and pushing yields (which move inversely to prices) to zero. Now, with a weakening dollar and gold prices holding steady, some see Treasuries as a bubble that's about to pop. Who will apply the pinprick?

Will it be Japan, which holds half a trillion of our debt? The president of a Japanese credit rating agency says the land of the rising sun should write off its holdings of U.S. Treasuries or start building U.S. roads and bridges in what he sees as Marshall Plan II.

Japan's holdings of U.S. debt is second only to China's, which has announced plans to build its way out of economic collapse. Analysts worry that it may dump its massive stockpile of U.S. debt to pay for it.

Another ominous sign: the price of an index funds that shorts (bets against) long-term Treasuries is on the way up.

If the bears are right and this bubble pops, it could be really bad:

Because foreign holdings represent a significant proportion of the stock of Treasuries outstanding, a collapse in Treasuries prices might soon be reflected in a collapse of the US dollar, with the accompanying threat of hyper-inflation in the USA and depression elsewhere. At that point, many investors might wish they still enjoyed the comparative calm of the ‘credit crunch’.

Via the FT's excellent Alphaville blog.

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The bubble to end all bubbles?