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Monday, March 31, 2008

The Dollar and Credit Crunch

McKinnon explained on wsj that the negative yields (inflation-adjusted) on Treasurys can not be due to "flight to quality" alone. The falling dollar and foreign central banks' intervention also played a big role. To prevent appreciation of their own currency, foreign central banks are buying more Treasurys thus reducing supply of Treasurys available for the U.S. financial institutions. Both drive up price on Treasurys.

(click to enlarge, source: wsj)