Just like a month ago, investors are once again flocking to treasuries. This time, they are pushing interest rates down to 1955 levels. The question is who is the buyer? I believe it’s Bernanke and the Fed. Would it make sense for the government to be issuing bonds (printing money) at very low interest rates and then taking the proceeds and buying old debt that are at higher rates? This helps their cash flow. They are refinancing themselves. Smart move.
Remember that the Federal Reserve doesn’t control interest rates. They set target rates and that’s on short-term paper. To get long-term rates down, it takes buyers of bonds. If the government is in there buying bonds and pushing rates down, that changes the game. I’ve been writing and discussing shorting treasuries and at the same time buying corporate and agency bonds. With the government buying the debt potentially, it’s driving rates lower and lower. This could continue for some time. So, the short’s not working at this point but I’m at the same time still buying corporate bonds and some agency bonds. I’m taking advantage of this fear. As you saw today, stocks are still extremely risky. I’ve been shorting on the way up during this rally as many of you know. One day can take those bullish people and turn them into bears very quickly. That’s why I’m spending more time in the bond market than the stock market these days.
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