"The US is bankrupt, and is either going to default or devalue the currency to the point of hyperinflation. "

Irrational Doomsday sees a bubble as well, but he/she also sees hyperinflation, which, while possible, is not a necessity or certainty:

"Treasuries are basically yielding 0% right now, sometimes even flirting with negative yields. And the Fed is going to continue to cut. And the gov't is going to continue to offer more debt, even saying it will use unconventional and creative means to issue more debt.

Why would anyone give the government free money, or in the case of negative yields, pay the government to hold it's money.

If people are worried about deflation, stick your cash in a mattress, at least you don't lose money on the deal.

It makes no sense, other than the fact that Treasury demand is now just operating as a speculative bubble. People are betting that more people will continue to buy up debt, driving prices up. This is an obvious speculative bubble, with absolutely nothing grounded in any notion of investment- with sovereign default rates at record levels, and no returns, or negative returns, how can you justify the risk/reward ratio?

You can't. This bubble is going to burst like all bubbles do, and government borrowing costs are going to skyrocket, as they are simultaneously going to attempt to release more and more debt, and the deficit is widening by record levels.

Eventually, they are going to have to start paying their interest with more debt instruments which is going to create a vicious cycle.

The US is bankrupt, and is either going to default or devalue the currency to the point of hyperinflation."

I certainly hope he/she is wrong.

"You can't possibly be willing to lend money to anyone and lock in a loss on the trade. It doesn't make sense. "

Accrued Interest on the Treasury Bond Paradox:

"I'm on record as saying that I think Treasury bonds have no logical lower limit in yield. While its conceptually hard to be bullish on the 10-year at 2.60%, the threat of deflation completely changes the game.

However, there should be one logical limit on any bond, and that's zero. You can't possibly be willing to lend money to anyone and lock in a loss on the trade. It doesn't make sense.

So when I heard that there were T-Bill trades occurring above par, I was more stunned that Princess Leia aboard the Tantive IV. Who bought T-bills above par? Why would you enter into that trade with a certain loss when you can simply hold currency at no loss?

And don't tell me the dollar is worthless bullshit, because you aren't better off buying dollar denominated T-Bills if the dollar is worthless. Hell, if the dollar was a problem, Treasuries would be cheap, not insanely rich.

Now normally I'd assume that someone got trapped in a short, but who is shorting T-Bills? Seems like an odd trade.

Anyway, if you know how the hell this could have happened, post a comment."

In the comments, people try to give a number of reasons. Of course, people think that they're going to make or save money with this buying, so that's not a reason that distinguishes this buying from any other. What are the presuppositions of this buying? It can only be deflation, and rather decent sized deflation at that. After all, why not wait and see what happens holding cash for now otherwise? One idea is that it's a sort of insurance because it's the safest thing around, but that is the definition of the flight to safety.

“Treasuries have some bubble characteristics, certainly the Treasury bill does,” said Bill Gross"

I've talked about a Treasuries Bubble, which, I don't like to say this, follows from my reading of the level of fear and aversion to risk and the resulting flight to safety we now see, which beggars belief from my point of view. From Bloomberg, one of the people I listen to chimes in:

"By Michael J. Moore

Dec. 11 (Bloomberg) -- The rally in Treasuries that pushed yields on bills below zero percent this week is adding to concerns that the $5.3 trillion market for government debt is a bubble waiting to burst.

Investors seeking safety from losses in equity and credit markets charged the Treasury zero percent interest when the government sold $30 billion of four-week bills on Dec. 9, the same day three-month bill rates turned negative for the first time since the U.S. began selling the debt in 1929. Yields on two-, 10- and 30-year securities touched record lows this month.

“Treasuries have some bubble characteristics, certainly the Treasury bill does,” said Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., which oversees the world’s largest bond fund. “A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk?” he said in a Bloomberg Television interview yesterday."

That's been my view as well.

“There is basically insatiable demand for Treasury bills,” Ira Jersey, a New York-based interest-rate strategist at Credit Suisse Group AG, said in a Bloomberg Television interview. “There is a number of reasons for this, not only angst over deflation and what’s going on with risky assets, but there is also just a lot of cash that does not want to take any credit risk.”

Hunger for Treasuries increased as financial companies reported $984 billion of losses and writedowns related to the collapse of subprime mortgages since the start of 2007. The losses froze credit markets and helped send the U.S., Europe and Japan into the first simultaneous recessions since World War II.

Gross said he regrets not buying Treasuries in the past year. “If we went back 12 months and we had known then what we know now, it would have been all invested in Treasuries,” he said in the interview.

David Rosenberg, the chief North American economist at New York-based Merrill Lynch, said last week that demand for Treasuries had reached the “bubble” phase like in technology stocks in 2000 and real estate six years later."

I'm a bit surprised that the Fed has let it come to this. As you know, I think that they should be printing money.

"Record-low yields on government debt have led money-market funds to waive fees to keep returns positive. If the Federal Reserve cuts its 1 percent target rate for overnight loans between banks, as is expected next week by all but two of 56 economists surveyed by Bloomberg, some Treasury fund returns may turn negative, said Peter Crane, president of Crane Data LLC, a research firm in Westborough, Massachusetts.

Treasuries have “absolutely” entered a bubble, said David Brownlee, who oversees $15 billion as head of fixed income at Sentinel Asset Management in Montpelier, Vermont. “There is very little rationality in my mind to bills trading at zero.”

Sentiment among investors in Treasuries turned negative for the first time in four months, according to a JPMorgan Securities Inc. survey of clients. The firm’s weekly index fell to minus 6 on Dec. 8, from this year’s high of 27 a month ago. The figure is the difference between the percentage of investors betting prices will rise and those expecting a decline."

I've argued that the same dismissal of common sense and assessing fundamentals that helped the housing and stock market go up are being repeated going down. It's not a learning curve.

"Speculation that the recession will result in deflation, or a prolonged slide in prices, is also driving demand for Treasuries. Consumer prices fell 1 percent in October, the most since records began in 1947, and may drop 1.2 percent in November, according to a Bloomberg survey of economists.

Deflation may worsen the economic downturn by making debts harder to pay and countering the impact of Fed rate cuts. Deflation also makes bonds more valuable, even with yields at record lows.

Treasuries may actually be “fairly valued,” Tony Crescenzi, chief bond strategist at Miller Tabak & Co. in New York, said in a report yesterday. Even so, yields will likely rise in mid-January as investors’ focus turns to prospects for an economic recovery, he wrote.

The U.S. pledged $8.5 trillion, more than half of the country’s gross domestic product, to spur lending and limit the damage of the recession.

Economists forecast higher bond yields as those efforts take effect over the next year. The yield on the 10-year note will rise to 3.66 percent by the end of 2009 from 2.67 percent today, according to 50 estimates in a Bloomberg survey. That would result in a loss of 3.88 percent as bond prices decline.

“At some point we are going to get some signal, some indication that this massive policy response is getting some traction,” said Mitchell Stapley, who oversees $22 billion as chief fixed-income officer for Grand Rapids, Michigan-based Fifth Third Asset Management. “The flight out of Treasuries is something that will be breathtaking.”

Of course, much, as always, depends upon government policies and actual human decisions, so deflation is surely possible. I'm just saying that it needn't be so.

"we must instead allow it to be destroyed, to be liquidated in as orderly a fashion as possible, as quickly as possible."

There are lots of people who don't like what I'm calling for. Sudden Debt is one:

"The latest 3-month US Treasury bill auction resulted in 0% rate and was oversubscribed four times. How about that, for deflation and risk aversion, eh?

I am not surprised. This is the hangover following the wild easy-credit party that ultimately saw financial engineering elevated to the same position as real engineering (yes, I was offended). The same party that created the awesome stupidity of $65 trillion in credit default swaps which first allowed piling on much more debt than prudent, and which are now inhibiting the cathartic process of its quick demise.

What's next? Will free money (for the federal government, anyway) result in another Greenspanite bubble? No, no time soon. This development is not something that the government wants, you understand. It clearly underscores the fact that deflation is happening as we speak, that assets carrying even the smallest amount of risk are shunned in favor of mere capital preservation. The debt trap has become - predictably - a deflationary liquidity trap, American economists' and policy makers' greatest phantom menace since 1929.

I will, thus, say it once more: instead of allowing this deleterious process to drag out for years by attempting to preserve debt (as the Fed and Treasury are doing now), we must instead allow it to be destroyed, to be liquidated in as orderly a fashion as possible, as quickly as possible."

I'm certainly for decreasing our debt, but I'm not sure what's being called for. Selling government assets? Increasing taxes? Cutting expenses?

I'll only say that the whole point of my plan is to ultimately reduce the debt and deficit. It is paradoxical that the only way to do that is to temporarily increase our debt, but such is the world.

"pushing interest rates on three-month Treasury bills to negative levels for the first time in postwar history."

How can an interest rate turn negative? Who buys such an investment? From the FT:

"Nervous investors on Tuesday paid for the privilege of owning US government debt, pushing interest rates on three-month Treasury bills to negative levels for the first time in postwar history.

The implied yield for three-month bills briefly traded at negative 0.01 per cent – the first time that has happened since 1940, traders said. At such a level, an investor is essentially paying someone to own the security.

The flight to safety helped the Treasury sell $30bn in four-week bills at a discount rate of zero per cent for the first time. That auction followed the sale of $27bn in three-month bills at a discount rate of 0.005 per cent on Monday.

Ted Wieseman, economist at Morgan Stanley, said that “demand for cash remained extreme” and described the result of the four-week sale as “absurd”."

If you know my views, you know that I consider this fear and aversion to risk and the accompanying flight to safety overdone. This is proof of that as far as I'm concerned.

"Investors have placed $100bn in institutional money market funds in the last month, boosting demand for Treasury bills. The scramble for government debt also reflects end-of-the-year “window dressing” by fund managers who try to send a reassuring signal to investors by holding large amounts of safe-haven assets such at Treasury bills when they publish their accounts.

“Some funds have guidelines that require them to own Treasuries,” said Jay Mueller, portfolio manager at Wells Capital Management."

I remember questioning the wisdom of these built in investment guidelines during a financial crisis at the end of the last quarter, yet here they are again. But do they explain the whole event?

"The implied yield for four-week bills briefly traded at negative levels in October after a prominent money market fund lost money as a result of the bankruptcy of Lehman Brothers.

Bills have been trading well below 1 per cent in recent weeks, and even the Federal Reserve’s overnight rate has slipped close to zero per cent. On Tuesday, the effective Fed funds rate was quoted at 1/16th, or 0.0625 per cent, below its target rate of 1 per cent.

In Tuesday’s action, demand for the new four-week bill was 4.2 times the supply, well above the average of 2.87 times in the previous nine weekly sales. Non-dealers bought nearly half of the issue. Demand was also strong at 3.3 times for this week’s sale of three-month bills."

I don't know, but it's another warning that we're dealing with more than simple economics can account for.

"The important thing to know about Mrs Watanabe is that, temporarily at least, she has all but stopped flapping her wings"

Who is Mrs. Watanabe?

"Mrs Watanabe is crude shorthand for Japan’s $15,000bn pool of savings, the deepest in the world and worth more than the annual economic output of the US. These vast resources are somewhat apocryphally marshalled by Japanese women, who have traditionally held a firm grip on family finances."

Let's see:

1) Rising yen
2) Lower interest rates
3) Next bubble

David Pilling in the FT:

"The yen carry trade has not been the only cheap source of liquidity in recent years. But Ashraf Laidi, chief currency strategist at CMC Markets, reckons it has been the biggest. He quotes figures suggesting that Japanese households alone, discounting savings mediated through life assurers and other institutions, have mobilised $500bn in outbound funds. That leaves aside speculators, who have borrowed unknowable amounts of yen to invest abroad, often on highly leveraged terms.

Just as state bank bail-outs risk moral hazard, more recklessness and the need for future bail-outs, so the unwinding of the carry trade carries with it the danger of the next great bubble. In Japan, the central bank appears to have reacted to a rising yen and sinking stock market by contemplating the uncontemplatable: a rate cut. Even the rumour of such has provoked a mini equity rally and a weakening of the currency.

This is poison for the BoJ. It hated having to keep rates low, fearing that cheap money can cause bubbles in real estate, in capital investment and in the carry trade. Its sightings of inflationary danger everywhere provoked mirth among outside experts. But few are laughing now."

And so:

"If Japan really is about to reverse course towards zero interest rates, it will once again become the source of almost free money for anyone with an appetite to invest. Worse even than that, says Mr Laidi, is the potential for an even more dangerous dollar carry trade. The Federal Reserve has been desperately cutting rates, and lopped another half point off again on Wednesday. The nearer US interest rates approach zero, the greater the incentive to move dollars into higher-yielding assets elsewhere.

These gyrations do nothing to solve the underlying problem, which is that Asia has an excess of savers and the US and Europe an excess of spenders. Unless that is solved, the world seems condemned to repeat the swings of recent years, as capital is arbitraged between countries where money is cheap to those where it is expensive."

Problems:

1) Dollar carry trade

2) Asia saves, the West spends

3) Here we go again

Is this real?