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

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

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.

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

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

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.

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

European governments debt may all be denominated in euro, but German and Italian debt are hardly the same thing, so the government euro bond market lacks the depth and liquidity of the US Treasury Bill market.

The Bank of England is buying UK government bonds ( gilts ).

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 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.

The public agency with the greatest expertise on Earth is of course the treasury that is, the British Treasury.

We are still in the last stages of a bubble in government debt that arose in the first stage of the financial crisis from the flight to security of US Treasuries.

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

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

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

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

So the government takes some pieces of paper, paints some official looking designs on them and calls them treasury bonds.

Chinese demand for Treasuries has enabled the US to increase its government debt almost threefold over the last decade, from roughly 6 trillion to 16.7 trillion.

Converting all outstanding government bonds with the exception of Greece s into Eurobonds would be by far the best remedy.

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 .

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

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

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)?

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.

The days of its open ended buying of Treasuries will soon come to an end.

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

Otherwise, Treasury bond yields would be far higher, thwarting monetary expansion by the Fed.

China does not buy Treasuries out of benevolence, or because it looks to America as a shining example of wealth and prosperity.

If you invest 10,000 in the five year TIPS, you can confidently expect a five year loss of 510.

They buttress their argument that the deficit is not an immediate problem by pointing to very low interest rates on long term government debt, with a 2 yield on the ten year Treasury bond and a negative real interest rate on Treasury inflation protected bonds (TIPS).

For example, the US government should offer more financial instruments like Treasury Inflation Protected Securities (TIPS), thereby allowing China to convert some of its holdings of US government securities into similar but safer assets.

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.

It may be too late to do anything about China s existing stock of US treasuries without causing a serious political and financial backlash. But China should at least stop increasing its holdings.

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Treasury

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