“The panic in the financial markets in recent months has driven Treasury bond prices to speculative extremes. Unfortunately, unlike the stock market, where hopes and dreams about future cash flows can often sustain speculative markets for years, it is very difficult to sustain speculative runs in bond prices. The stream of payments for bonds is fixed and known in advance. For foreign investors holding boatloads of U.S. Treasuries, the recent rally in the U.S. dollar, coupled with astoundingly low yields to maturity, have created a perfect time to get out.”
The biggest problem facing large holders of dollars abroad (e.g., China, Japan, etc.) is that they can’t unload a meaningful amount of them without substantially impacting the value of their remaining holdings. There simply aren’t enough buyers to soak up hundreds of billions worth of Treasuries and agencies in a short period of time. The Fed, by saying that they are “evaluating” buying longer term Treasuries just gave them their out, if they want it. And the Fed can buy for extended periods just by printing. This is why the dollar index plunged on the announcement last Thursday. Even though it has since stabilized, Hussman makes the case that it’s far from over. He doesn’t use the word ‘crisis’ lightly.
