The investment question of our time is whether US Treasury bonds are in a bubble, offering what author Jim Grant dubbed “return-free risk”, not the risk-free return investors seek.
The argument advanced by many bond bears is that Treasuries are manipulated by their two biggest buyers, both insensitive to value: the US Federal Reserve and China.
The Fed is explicitly trying to manipulate prices as part of monetary policy. But China buys only as a side-effect of controlling its currency. As that control is deliberately reduced, China should buy fewer Treasuries – no longer pushing yields down. There are two reasons to think this is wrong, or at least premature.
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