Since 1975, the nominal annual premium on the 30 year Treasury bill has averaged 2.2 in other words, over its lifespan, the 30 year nominal T bill yields are 2.2 percentage points more than the expected average of future short term nominal T bill rates.

The yield on ten year Treasuries is now 1.6 , down from 3.4 at the start of 2011.

The current 30 year T bill yields 3.2 annually, which means that, unless the marginal bond buyer today is unusually averse to holding 30 year Treasuries, she anticipates that short term nominal T bill rates will average 1 per year over the next generation.

Whenever a crisis erupts, the value of US Treasury bonds gets a boost.

The low interest rate on long term Treasury bonds has also boosted demand for other long term assets that promise higher yields, including equities, farm land, high yield corporate bonds, gold, and real estate.

First, China has an understandable interest in diversifying its substantial holdings of foreign exchange reserves away from low yielding US Treasuries to real productive assets with higher returns.

A ten year Treasury has a nominal interest rate of less than 2 .

The only slight difference is that the Fed is buying seven year Treasury notes rather than three month Treasury bills.

For example, while the current yield on 10 year German government eurobonds is 3.33 , the corresponding yield on Greek eurobonds is 4.7 and 4.77 for Ireland s eurobonds.

At the moment, the yield to maturity of the ten year US Treasury bond is 3.76 .

The long term nominal and real Treasury rates continue to be absurdly low, so much so that I rub my eyes whenever I see them. And the market inflation forecast the spread between Treasury Inflation Protected Securities and normal Treasuries remains extremely tame.

China s official foreign reserves are increasing at a rate of about 1 billion per business day, almost all of which is used to buy US Treasury bonds and other international assets that carry a minimal rate of return.

Curtailing purchases of US Treasuries is a perfectly logical outgrowth of this process.

But China s reserves have long suffered as a result, yielding only 2 on US ten year bonds, when they should be yielding 3 5 .

The low interest rate on long term Treasury bonds has also boosted demand for other long term assets that promise higher yields, including equities, farm land, high yield corporate bonds, gold, and real estate. When interest rates rise, the prices of those assets will fall as well.

Some critics object that a collapse of US Treasuries and a dollar crash are not the same.

Chinese leaders clearly realize that their hoard of T Bills is a problem.

Frustrated investors would then dump their US Treasury securities. Bond yields would shoot up.

The very low interest rate on long term United States Treasury bonds is a clear example of the current mispricing of financial assets.

Yes, there is a minus sign in front of that if you buy the five year TIPS, each year over the next five years the US Treasury will pay you in interest the past year s consumer inflation rate minus 1.02 .

BERKELEY In late May, the yield to maturity of the 30 year United States Treasury bond was 4.07 per year down a full half a percentage point since the start of the month.

Indeed, the rate on inflation adjusted US Treasury bills (so called TIPS ) is now negative up to 15 years.

Not surprisingly, the major investors in US Treasuries, China and Japan, have expressed alarm.

At the moment, the yield to maturity of the ten year US Treasury bond is 3.76 . Subtract 2.5 for inflation, and you get a benchmark expected real return of 1.26 .

In 1985, the interest rate on ten year Treasury bonds was 10 , even though inflation had declined to less than 4 .

The US can finance these deficits in the short term in fact, interest rates on US Treasuries have recently fallen to record low levels.

The market price of Treasuries eventually will fall to levels dictated by US economic fundamentals.

First, there are limits to how many trillions of dollars China can, and should, put into US Treasury bills.

The result is that China and other East Asian countries own a large and growing stock of US Treasury bills.

But hoarding international reserves, mostly in the form of low yielding short term US Treasury securities, is expensive and inefficient.

But there is no guarantee that demand for these Treasury notes among foreign investors including foreign governments will be sufficient.

It would finance the purchases by issuing European Treasury bills joint and several obligations of the member countries and pass on the benefit of cheap financing to the countries concerned.

Historically, the real interest rate on ten year Treasuries has been above 2 thus, today s rate is about two percentage points below its historical average.

China may point to the mountain of US Treasury bonds that it has bought up, thereby helping to sustain America s budget deficit.

Since WWII, the US unemployment rate has averaged 8 when the short term nominal T bill rate is 2 or lower.

But, in July 2011, the ten year US Treasury bond rate crashed to 2 , and it was below 1.5 at the start of June.

China buys Treasuries because they suit its currency policy and the export led growth that it has relied on over the past 33 years.

But these limited kinds of choices for example, a T bill fund with 90 in T bills and 10 in an indexed stock fund could easily be introduced into the public social security system.

The Commission (or Treasury) would then decide how many additional Eurobonds to issue and on whose behalf.

In the short run, then, a US Treasury market crisis might lead to some knee jerk appreciation of the dollar.

That expected inflation rate is consistent with the difference in interest rates between ordinary US government bonds and Treasury Inflation Protected Securities.

It naturally raises the question why aren t people moving their money from TIPS (and US Treasury bonds and other safe assets) to stocks (and other relatively risky assets)?

Nor is sympathy at work China does not buy Treasuries because it wants to temper the pain of America s fiscal brinkmanship.

Moreover, the US government provides a very good inflation hedge in the form of Treasury Inflation Protected Securities (TIPS).

Indeed, US Treasuries were among the few assets that did not decline during the global financial crisis in 2008 2009.