Shorting US Treasuries could be a mistake

The budget deficit guarantees the existence of public debt over many years. Foreigners are thinking about the financing of the budget, underscoring the recent report that China sold some of their Treasury securities. The crisis in Greece and other countries underlines the risks of buying bonds of countries with high debt. And finally, the expansion of the Fed balance sheet through various lending programs and the purchase of assets threatens both the authority of the Central Bank, and rising inflation. Higher inflation certainly pushes long-term profitability is much higher. Indeed, a month ago, a respected author and hedge fund manager suggested that “everyone” should be put on lowering Treasury securities.

Maybe so. Of course, in the long term, the U.S. must return to fiscal prudence and to reduce their deficits, or they will face the rising cost of credit. However, in the medium term – say, in the next few quarters, a reasonable investment horizon – it is arguable that the market for Treasury securities will be maintained at current levels and may even surprise and a lower yield.

The deficit is high and amounts to about $ 1.5 trillion, approximately 11% of GDP, as in 2009. Forecast deficit for 2010 was fairly stable during the year. In other words, the current prices and a steep yield curve reflects the level of continuing support for the deficit. Given the economic recovery, incomes should also soon stabilize. In any case, the relationship between the absolute size of the deficit and yield inconclusive. Japan ruled the large deficits in 20 years, combined with the lowest yield in the world.

However, Japan is funding itself from domestic savings, while the U.S. relies on foreign investors. But is it foreigners do not feel is anxiety? Last month, the Treasury announces the number of holders of Treasury securities for the month. Although foreign investors as a group, to buy securities, the Chinese, most were in the role of sellers. Can it be like a canary emitted from the coal mine? It is reported that China’s stock dropped from $ 800 billion at the peak, up to $ 755 billion by the end of the year. These data have attracted considerable attention, but only after changes made to them. The adjustments show that among foreign investors, in aggregate there were more buyers in 2009 than previously stated. In particular, China’s savings have been significantly revised in the bigger side, the latest evidence that its reserves amount to $ 894 billion, rather than earlier claimed $ 755 billion.

In addition, the private sector, the U

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