The Treasury Bond Market Untangled

The U.S. Treasury bond market has come to receive serious attention in recent trading.

When Treasury bonds show action, so does the dollar. If we see a decline in prices for long-term Treasury bonds, the dollar sinks. According to a March 2009 Fed's Flow of Funds Report, there are $14.5 trillion in Treasury securities, agency securities and mortgage-backed securities outstanding.

Many countries invest heavily in our country's debt as an investment and China is the top holder of U.S. bonds. Several top economists believe that if the purchase of U.S. bonds by China were to stop, the U.S. interest rates would increase to make our debt more attractive.

The actual value of U.S. Treasury securities is increasingly being focused upon because of out-of-control governmental spending. China wants assurance that their assets will be safe; if the question of U.S. credibility would arise, they may likely liquidate some of their U.S. assets to cover themselves.

If other nations do not buy U.S. debt, the only other option is for the U.S. Treasury to buy Treasury securities and, thus, increase the money supply dramatically. In order to attract investors, rates of interest would have to rise. As what happens when the Federal Government begins to habitually buy Treasury bills, inflation will soar. In the current climate, the Fed bought over 500 billion dollars in mortgage-back securities.

Normally, high interest rates is associated with the central bank as the government attempts to ward off inflationary pressures that come with an expanding money supply. Yet, there is less demand for Treasuries and the only other viable option is to have higher interest rates to entice buyer demand. Unfortunately, higher interest rates would only further decline the economy. As the result of higher interest rates, a greater burden is placed on the citizen which results in an escalation in mortgage defaults and more consumer debt.

The record-breaking Treasury offerings out of Washington along with the Fed churning out dollars bills is incredible. The floodgate pushed open by the U.S. Treasury is making bond yields soar. Economists are beginning to wonder who will be purchasing these bonds.

A nation who spends in an out-of-control way can eventually destroy itself. A famous economist believed that inflation was a disease which could destroy a society if it wasn't stopped.

China is the top holder of U.S. debt. Famous economist, Milton Friedman, said that the fate of a nation was ''inseparable from the fate of its currency''. Soaring rates of interest and inflation put an already fragile economy on the alert. Thus, the bond yields are higher as the government's deficit shows no sign of slowing.

by: Carlos Buckingham

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