Long dated US Treasuries reversed part of their dramatic gains on Monday, dragged down by worries that foreign investors were actually dumping US debt paper in last week's run-up. According to a Bloomberg report America's creditors actively pursue a diversification of their assets, shifting away from the Federal Reserve Dollar. The next Treasury Inflow Capital data will bring more clues about the amounts moved.
Investors are correct by doing so. Last week's flight into US Treasuries was a flight into liquidity but certainly not a flight into safety unless one is satisfied with nominal and not real returns.
It appears a bit illogic to consider debt obligations from the biggest debtor the world has ever seen as a safe investment. Let us not forget that the AAA rating for US IOU's has never changed since debt has been rated. The paramount difference is, though, that the USA was the world's biggest creditor when it aquired its AAA rating. Now it is the biggest debtor and to keep the US economy as a going concern it needs foreign investments like a vampire thrives on blood.
It is true, the USA will always be able to pay off its debts as it is the only nation in the world that indebts itself solely in its own currency. The game of ever expanding credit can go on - as long as investors play along.
This is not very likely, now that the whole world has agreed on the fact that the financial system built on credit excesses is under severe stress and especially US debts have become the hot potato nobody wants to hold.
The seize up in interbank lending has provoked the Sunday Times to call the current mess oozing from mortgages into everything else "the worst crisis for 20 years." Banks have stopped lending to each other in order to allow a rollover of $113 billion in commercial paper due later this week. This is more demand than a month earlier when the liquidity crisis started. And the other big headache is still out there:

The prospect of serious market indigestion from maturing commercial paper is not the only headache for the banks. Globally, they have $380 billion of loans and bonds to be laid off from leveraged buyouts and other private-equity deals at a time when the markets have shifted sharply against them.

ECB Starts Panicking
Bankers on the continent are getting cold feet too.