Treasury Bond Bubble? A Big Sign of Inflation

This Bloomberg article explains a possible bubble in U.S. treasury bonds.  Their reasoning is that a bond trading at zero, near zero, or negative interest rates provides no return, thus there should be no market for it. Why would investors buy bonds that weren’t going to make them any money?

The explanation ties into an article i wrote earlier and it had to do with Peter Schiff’s theory that the strength of the dollar lies in de-leveraging of assets abroad. Because of the economic panic, investors sold off everything they had and put their money into U.S. treasury bonds.

To buy the bonds, they needed dollars first though, increasing the demand for dollars and thus the value, resulting in a strong dollar. Because of the image of a safe-haven that Treasury bonds enjoy, there was a scramble for the bonds in an uncertain time, regardless of the returns.

Once these investors get back on their feet and find other places to put their money as the situation plays out, they are going to want to get out of the zero or negative return of the Treasury bond market. When they do that, they will most likely invest abroad in economies that are experiencing more growth or at least stability and potential like China.

When the sale of Treasury bonds occurs and investors flow to other economies, the dollar is going to be left standing without a chair. The increase in supply will trigger inflation that will be hard to stop given the enormous increases to the money supply by the Fed via their bailout policy.

Bottom line… People invested in Treasury bonds because they didn’t know where to go. It’s a terrible investment though and actually loses money. Once that fact becomes apparent and openings become available elsewhere, the treasury bubble will burst and so will the dollar.