Bond War: Krugy, Fergy, and Grossy

Daniel Gross opined on the ongoing battle to interpret the spike in long-term T-Bill rates. Is the spike a signal from the market that the USG's long term health is at risk (Ferguson's view)? Or, does it signal a retreat from safety (Krugman's view)?

My take on the matter was that it was a combination of factors. There are technical reasons to take cash out of 30 year Treasurys and reinvest them in foreign denominations. Namely, the US will lead the recovery, but it will still face a long and painful period of economic stagnation. This US-led recovery will enable smaller, more vibrant economies to flourish. In the short run, it will keep China afloat. In the long run, though, this means the US equity market and currency is overvalued. For an investment, it makes sense to take some portion out of the US.

I have come to realize, also, that many big money investors are extremely ideological and are tied to long-standing perceptions that Democrats are bad for business, despite the historical trends that suggest otherwise. There are bond vigilantes. They are Bernanke's audience.

Gross offers a rather different point of view, and one that I find convincing:

Both the Fergusonians and the Krugmanites (of whom I count myself one) err in
reading too much into short-term fluctuations in bond prices. There's so much
more at work. Randall Forsyth of Barron's explains a technical reason for the short-term spike in 10-year and 30-year rates. Banks and financial institutions that own mortgages hedge their exposure to refinancing by buying and selling Treasury bonds. When mortgage rates start to rise, as they've done in recent weeks, institutions do
the opposite and sell. "While mortgage investors previously had bought
noncallable Treasuries to offset the risk of their mortgages, mortgage investors
have unwound that hedge, selling their Treasuries," Forsyth writes.

If nothing else, this three-way exchange demonstrates the difference between finance and economics.

This