Welcome China girl.
We worry about China dumping our treasuries but that would be a disaster for them as well. You see we are so interconnected that we are both in a small locked room and either side has the power to launch a grenade. So China can’t dump so they were simply shifting
The Chinese was buying the liquid SHORT end of Treasury debt shifting out of the mid and long-range (including agency debt). The Fed, on the other hand with its $300 Billion 2009 Treasury debt monetizing program is making up the slack in the mid range (both Treasury and Agency Debt) leaving the long end alone for the time being, where Treasury has "not dared" to offer a lot of supply.....that would steepen the curve and signal that treasury is trying to roll-over debt into longer maturities and undermine the Fed's attempt to reflate.
So, if the Fed indeed makes good on this threat as outlined by McCulley, it will probably buy the long end in large quantities, where no one else, private domestic or foreign official, will finance Treasury, because everyone knows that principal will devalue much faster than the yield paid will compensate.....the long end is definitively yielding negative rates at this point. However, there is yet another monkey wrench in that Ben has threatened not to buy more of our own treasuries. For those of you that do not understand thism one indirect bids was mostly us buying our own stuff. In June we quietly changed the rules so that the primary dealers could but for the US govt as well. The public at large missed that one but our overseas lenders did not. You think China is the big holder with $2T, the Fed bought over $5T and that my friends is monetizing the debt. If you buy your own money then explosive inflation is just down the road.
That explains why the bulk of Treasury debt is issued to date in the short-to-mid range.
If you were wondering who in their right mind would buy anything but the shortest duration paper you were right. Now Tim went to China, got laughed at and got taken behind the wood shed. So now watch as they shift again to TIPS (inflation protected). TIPS up until now was a very small part of the market watchas now it becomes our only product that will sell. Now as inflation flares up watch our debt explode yet again. We can't invent some BS inflation measures for them it has to be realistic. So up goes COLA in SS and everything blows up.
One more thing: If there is one thing politicians are absolutely terrified of, it's unemployment. That will get them unelected faster than any scandal. The thing that could trigger the monetizing even before China stops buying our debt is prolonged and rising unemployment. When the unemployed become restless, congress and the president will be begging Bernanke to print and personally drop the money at the curb side.