US investors dumping US Treasury bonds

Jim Lacey reports in NRO that the biggest fund managers have joined a general trend out of US bonds.

The wisest and most successful bond investor of all time, Bill Gross, has dumped his bond fund’s $150 billion investment in U.S. bonds. One should not ignore the importance of this event. The largest bond fund in America no longer believes that Treasury bonds are a good investment. Moreover, Gross is not alone. . . Virtually everywhere you look, from great investors such as Warren Buffett to insurance companies such as Allstate, everyone is dumping their long-term U.S. debt and either buying debt that matures in less than a year or moving their money elsewhere.

Lacey writes that the "old reliables" - China, Japan, and OPEC - are still in the market for 30 percent of all new debt, but the rest is being bought by the Federal Reserve. "For the first time ever, Americans are refusing to purchase their own country’s debt" - at current bond yield rates. 

By printing new money to buy debt, the Fed is both holding interest rates artificially low and flooding the world with dollars. Fed purchases have lowered rates to the point where there is no room for further decreases. With no more upside potential to holding debt, investors are fleeing on the assumption that the Fed will soon exit the market, causing rates to rise dramatically. Such a rate rise lowers the value of all current U.S. debt: Who will pay $1,000 for a bond paying 3 percent when she can get one paying 5 percent? Anyone who wants to sell a $1,000 bond they already own is therefore forced to lower the price if they wish to attract buyers. No one holding any of the almost $10 trillion in U.S. public debt is getting much sleep these days.

Lacey figures the crunch will come as soon as June, when the Fed either has to stop pumping money into the system and submit the domestic economy to the cold turkey of increased interest rates across the board, or else continue to flood the world with dollars, driving down the value of the currency, raising the cost of commodities and fueling world inflation.

He thinks that once inflation takes hold in the US, the Fed will have to turn off the pump anyway, so the bullet is best bitten now. I'm not so sure: I would be surprised if the Obama administration is not "doing a Gordon Brown" in the expectation of losing the next election, and leaving its successor the whole mess and the unrest and unpopularity that will come with having to clean it up.