As we suspected in our last update in September, the flight to quality funding of the U.S. budget deficit would replace the end of QE2 and almost 100 percent indirect financing of the deficit by the Federal Reserve. Looking at the chart one can only imagine where interest rates would be if the deterioration of Europe hadn’t coincided with the end of QE2.
As they continue to fiddle in Washington and fail to address the long-term fiscal issues we know that trade is coming and is just a matter of when, not if. Sovereign risk is all about confidence and it appears all roads lead to deflation in 2012, so U.S. Treasuries are the chic place where the beautiful people currently hang. Kind of like Rome, Madrid, and Paris used to be for European models banks.
Click charts to enlarge and here if charts are not observable)
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