After Jim Rogers joined Bill Gross in warning on treasuries, the most interesting question that appears is who in fact is continuing to buy these bonds? With record low earnings and even losses from time to time, it is obvious that no one will be keen on putting money in government bonds. Even more - much investors say they will go "short" on bonds. So who is buying these bonds?

The most logic answer is the most dangerous - FED. And not only FED, but the central banks as a whole. They are printing money and giving it to their government to finance its deficit. The system of money-prink is generally going in 2 models. The first model is the low interest rate on money given from the central bank to the commercial banks. This system is profitable for banks even with record low interest rates, because the borrowing rate is even lower. I.e. FED gives the banks dollars at 0,25%, they buy bonds at 1,5-2% and make an easy profit of about 1%. The more times you repeat this system, the bigger is the profit. Banks do not lose from the fact that inflation can be over 2%, because they do not owe such a high interest rate to FED.

The second model is of direct buying bonds from FED via so called QEs. As we see these programs are prolonged indefinitely.

So it is obvious we are in a classic money-print spiral when government is becoming totally dependent on the central bank, and all real market investors are kicked out of investing. This simply means a constant flow of new and uncovered money on all markets.

I think the investors that are going "short" on bonds will not win big profits. It is impossible to be allowed interest rates to go up (i.e. bonds to go down) because this will lead to a government bankrupt. So central banks will keep buying bonds. Of course there is no much risk of losing on short positions, because the interest rates are almost at zero so there is no ground to go down much more (i.e. there is no ground for securities to go up). Most probably it will happen something like the Swiss franc's fixed exchange rate to Euro. The market presses the rate up, the central bank presses it down so the rate stays fixed at 1,20 Francs per Euro. And the Swiss Central Bank is buying unlimited quantities of Euros.

Just like FED is buying unlimited quantities of Obama bonds :)

What is next? May be a Zimbabwe episode... :)))

Dobri
Fab 7th 2013