Now that we are finally admitting that inflation may be a factor -- at least on a "non-core" basis, we may actually begin to think about when the Fed will raise interest rates.
People do not seem to be talking about what would happen to the U.S. deficit if we must pay more to borrow.
So if the economy does better, inflation increases, interest rates rise, treasury prices decline, the Treasury borrows more to fund higher interest payments, then treasury prices decline further, U.S. dollar will be weaker (at least against those with less problems than the U.S.) + usual snowball effect of sellers further depressing prices.
I suppose the Fed can implement QE3 -- buying more treasuries (and other securities that are crowded out by increased Treasury borrowing) while nominal interest rates increase. Perhaps the U.S. government will takeon some austerity measures.
In the end -- the E.U. and Japan can hold treasuries because their currencies will likely decline more than the dollar. The Chinese have to hold treasuries -- though they seem to be diversifying out into energy, commodities and even equities.
Everyone else? Everyone should buy and hold a lot of treasuries when the return gets above 9%.
