Tuesday, December 11, 2007

The Fed may trigger off a run on Treasury bonds, says Wallenwein

Alex Wallenwein thinks the Fed will curb its impulse to drop interest rates as much as people want, because of its fear of inflation. He expects it will backfire when people figure this out.

Wallenwein suspects that the Fed has been buying longer-term US Treasury bonds to sustain demand and so keep interest rates low, but he thinks that once others scent the Fed's fear, there will be a massive dump that will throw more on the market than the Fed can mop up. This, he thinks, will send longer-term interest rates soaring.

His conclusion is that gold will perform its usual function of a safe haven in times of uncertainty.

As I pointed out this summer, the UK has (fairly recently) become the third-largest holder of US Treasury bonds.

2 comments:

  1. James Higham11 December 2007 at 15:14

    This might be of interest, Sackerson:

    http://www.morganstanley.com/views/gef/archive/2007/20071210-Mon.html#anchor5880

    ReplyDelete
  2. Sackerson11 December 2007 at 18:53

    Thanks. It's all carefully weighed and what do I know anyway, but I'm interested in their comment:

    "... the Fed will likely judge that the downside risks to growth outweigh upside inflation risks."

    Looks like they're betting the other way from Wallenwein.

    ReplyDelete

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