US Treasury Market Looking Shaky

Take a look at the numbers below of a fairly recent 30 year US government bond auction, things are not looking good.

(Source: SeekingAlpha.com)

Out of the highlighted numbers two of them are particularly horrible; the Bid to Cover and Indirect. The bid to cover is calculated by taking the number of bids received divided by the number of bids accepted. Essentially the higher the bid to cover the higher the demand. In the bond auction community, a bid to cover of 2.0 or less is considered an auction failure, and we came very close to that.

Soft demand in a low bid to cover ratio is verified, as foreign demand for treasuries is falling. China recently sold about $35 billion worth of their treasuries, and Japan sold about $10 billion worth of their treasuries. Also, Dec 2009 was the worst sell off on record. Interest rates could be increasing in the near future at the worst possible time for the US because of the sheer amount of debt to be auctioned in the near term future.

Then the indirect number is high. An indirect bid is a bond bid that does not go through a dealer, and this is generally viewed as quantitative easing because there is no transparency in who is bidding. Nearly 30% of the winning bids came from indirect bidders. In the bond market community this is seen as the US govt purchasing more of their own debt with the intention of selling at a later time when demand is stronger.

Bond market is currently leaning more towards inflation instead of deflation. This could be largely because of the long term weakness in the US dollar. A good indication of confidence in the US dollar is shown in the price of the treasuries. If the chart was extrapolated five years in the past we would see that the current price level is what the price was in 2002.
(Source: Google Finance TLT quote)

Conclusions:
1. This decade we should see some serious inflation
2. Interest rates must rise to entice foreign buyers to take on the risk
3. This decade is going to be a horrible one for the US dollar's purchasing power; hyperinflation is probable
4. Quantitative easing will not slow down, but rather accelerate as demand lessens over time