U.S. Treasury Market Now in Hands of Speculators Who Will Blow It Up

Since the Moody’s downgrade of U.S. Treasury debt, interest rates in the world’s largest financial market have started to rise again. But a Bloomberg News article on May 19, “Bond Investors Detect Trouble in U.S. Debt Stripped of AAA Rating,” warned of a bigger problem. Treasury debt, doubled in just the past five years, is being issued larger and larger volumes, but in shorter- and shorter-term bills and notes, which have to be rolled over by new issues almost every year. And the demand for this short-term debt is being provided by $7 trillion in money-market mutual funds, specialists in the repurchase or “repo” derivatives markets, while the demand for middle-term Treasury notes is increasingly dominated by hedge funds speculating with “basis trade” derivatives and highly leveraged borrowed funds.