In the long term, long term bond yields should rise. Here’s why: our long term bonds are bought by foreign central banks who are recycling US dollars from all our overconsumption. Once US consumption slows –> fewer dollars going overseas –> fewer Treasury bills and bonds are bought –> price of Treasuries and bonds goes down as demand declines –> yields rise.
This could play out differently if the US convinces other countries or the Plunge Protection Team (imagine printing dollars) to start buying treasuries. Or Saudi Arabia, rich with petrodollars, could end up buying the Treasuries that China and Japan and the other countries don’t buy anymore. We can’t track Saudi’s dollar buying through the Flow of Funds report, because Saudi does not report their purchases. Perhaps some currency revaluation has some effect that I don’t understand.
I would like to hear what others, especially Rich and Chris, think about this scenario of rising bond prices due to lowered imports.
