Saw an interesting post by Bruce Krasting on ten year rates where he poses the question is the 10 year going to 3%?
At some point the answer has to be yes. China has trimmed its holdings by 260B. Banks have been buying hand over fist, but now they own 1.8T. But the treasury is ejecting $100B per month of new borrowing. So of course Krasting gives us the easy answer of who will buy all of these treasuries:
The easy answer to this conundrum is that the Fed will just keep buying more bonds to keep rates artificially low. I say it can’t do that. If the Fed announced tomorrow that it was going to TWIST the market to keep the ten-year at 2%, crude would rise $150 in a month. Bernanke understands that.
Bernanke may understand this, but is he really going to take his foot off the gas? Who knows? It seems that the easy way out is inflation, rather than a hard crash in financial assets and massive deleveraging in the credit markets.