The short-term treasury yield is at 1.15% after falling as low as 0.2% last week, something like 60-year record. Why?

I think the primary reason is simple. Corporations, big and small, and even some individuals, are worried that the the ongoing financial crisis will prevent banks to fulfill their obligations on credit lines. While cutting the outstanding line of credit for home equity loan could be relatively easy, cutting the corporate credit line is more problematic, unless the corporation is downgraded. The last data I heard are about $2.5 trln of untapped credit lines.

What I think happened last week is a true run on the banks. The corporations are tapping the credit while they can. But while they don’t really need those money they just put them on the money market, which goes straight to short-term treasuries.

Watch $IRX, at this depressed levels it signal that we have small bank runs all around.

With the new $200 bln credit facility coming (I think today), Feds are swapping various papers for treasuries. Banks don’t really need treasuries, they need money, so they will be forced to sell what they borrow, what is essentially a short sale.

Step two. Very soon we will have a very strong vested interest of various troubled institutions for treasuries to go down, because they are short. They are short not because they gamble the market, but because that’s how they got money. Please expect various news media outlets to talk their book, i.e. everyone around will start talking how treasuries are overvalued. Together with dumping new loads of treasuries on the market I think that will work. We should have a significant correction in treasury prices, without violating the overall bullish trend. I already sold over 60% of my position and I will patiently wait for better entry point, it should take couple of months