Treasury Bubble Alert! Why the World's Most Overlooked Bubble Continues to Grow

By Ashish Advani

I have been talking to you about the Treasury bubble that has been inflating for years now. Today I want to give you a look at how this bubble reached epic proportions in just the last two years.

The rate of increase took on dramatic proportions in September 2008 with the collapse of Lehman Brothers. Now you will ask me – Ashish, what has Lehman Brothers got to do with the Treasury Bubble?

Excellent question!

As I’m sure you remember, the world markets spun out of control when the U.S. Treasury and Fed abandoned Lehman Brothers on Sept 15th 2008. In other words, they allowed this major financial services firm to fail.

As Lehman crumbled, the world’s traders started to panic. Everyone started guessing which firm would be next on the chopping block.

Meanwhile, the panic on Wall Street drowned out all rational thoughts. And in the infinite wisdom that prevails during panic moments, the world’s traders abandoned the so-called “risk” trades. That includes foreign currencies, stocks – pretty much everything. Instead, they started buying up U.S. dollars. And with these U.S. dollars, they invested the funds in U.S. Treasuries.

As a result to unprecedented demand for U.S. Treasuries, the prices of these bonds skyrocketed and interest rates plunged….

Irrational? Yes, But Still a Reality

What I cannot understand for the life of me is how traders can sell off everything in their diversified portfolios, and buy dollars of all assets and call that “reducing their risk.” But that’s exactly what they did.

Just as Lehman Brothers collapsed too…And last time I checked, Lehman Brothers was a U.S. company. Also, in fall 2008, everyone was losing their faith in U.S. banks and the entire U.S. financial system.

And so when the U.S. is on fire, we eliminate risk by buying U.S. dollars and Treasuries. Clear as mud, right?! But again, that’s exactly what happened.

In any case, that was then and this is now.

The 10-year Treasury Yield has historically averaged around 5.25% over the last decade. But this yield plunged as low as 2.2% in October 2008 – just after Lehman collapsed. So 10-year yields have traded at less than half of their normal levels in the last two years.

As most panicked companies completed their purchases of U.S. Treasuries at astronomical prices, the yields started rising and Treasury prices started declining. As a result, most U.S. Treasury investors stand to lose a ton of money when they exit the investment.

And that my dear reader, is the biggest bubble yet to burst.

Who Buys All Those Treasuries? Oh That’s Right, the Fed

The U.S. Treasury issued over $1.6 Trillion Dollars of Debt in 2009. That’s the highest issuance of debt in the history of the U.S. And if you think that’s bad, the U.S. Treasury will issue debt well over $2 Trillion this year.

That is “T” in Trillions, folks!

It won’t stop there. The government issues Treasuries to cover their debts, and we are expecting to see record deficits for the next 10 years. That means we will see even more Treasuries issued in 2011, 2012 and beyond.

But that doesn’t even begin to scratch the surface of this problem.

The biggest problem is not that we’re issuing record numbers of Treasuries. The bigger issue is who is buying. As I mentioned, Lehman’s collapse sent panicked investors racing for U.S. Treasuries and the dollar.

But as the markets cleaned up in March 2009 and beyond, the government had to get a bit creative to sell their Treasuries. The Federal Reserve bought a huge chunk of that unwanted debt.

In fact, I just read that the Federal Reserve bought 80% of all debt the Treasury issued in 2009. Folks, if this news is true, it scares the bejeebers out of me.

We have to finance our ever-growing debt. And if the Federal Reserve is just creating more money to buy up our debt, then we are essentially creating more debt to cover our massive deficits. That’s like robbing Peter to pay Paul – only MUCH worse.

If our very own Federal Reserve (and not outside investors) are buying those Treasury purchases and financing our ever-growing debt, then we are in very serious trouble in 2010, 2011 and further.

$2.1 Treasuries Sold Last Year Is a Victory? Oh Please!

The mainstream media is not in the habit of breaking bad news to us. Unfortunately the respected Wall Street Journal is no exception.

On December 31st, they reported that the U.S. Treasury sold more than $2.1 Trillion in Treasury notes and bonds this year. That was more than the past two years combined. And instead of this being a negative sign for the economy, the WSJ hailed it as a victory for the U.S.

But in the WSJ’s defense, they also mentioned that Treasury investors were losing money. In fact, Treasuries were on pace for the worst annual return since at least 1973. And yet regardless, investors from all over still showed up for the auction to pile into Treasuries and inflate this bubble further.

If the Treasury bubble is indeed half as large as I fear, we are in for the worst financial crisis that the U.S. has ever faced. This has the potential of making the 1929 depression look like a minor dip.

In my newsletter, Currency Capitalist, I have been warning about this impending disaster for months now. My colleague Chuck Butler and I have also recommended plays that will protect the subscriber from this deluge that is about to be unleashed on the un-suspecting U.S. citizen.

I would recommend that you take strategic positions in both foreign currencies and metals to protect you from this Treasury Bubble crash.

Because when it blows, trust me – you don’t want to be left holding only dollars, dollar-based stocks or Treasuries.

For more on this ground-breaking Treasury-Bubble story, read our latest special report. 

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