Without an explicit RETROACTIVE bailout that saddles the US tax payer with $5.2 TRILLION in liability, people are worried that these players, especially foreigners, will quit buying US Treasuries. Well, that’s the risk you take. But at this point in time that is just speculation. Many of these investors have already significantly lightened their US Treasury exposure. Strangely enough, even more so around the time the news began to broke that the Government was considering retroactively backing $5.2 Trillion in Agency debt and RMBS’s.

What do you think happens to Treasuries if you do put the US at that great of a risk? US Treasuries will still get hit but by a much larger pupulation of owners and for a much longer period of time. If you saddle the US with an open ended, retroactive bailout of the Agencies for some of the worst loans ever made from 2002-2007, a disaster will ensue. We already know that GSE’s have significant subprime and Alt-A holding and much of their Prime paper is closer to Alt-A. Defaults are soaring across all paper types. Foreclosures could continue for years.

Just think about it for a minute. If we back all of this, much of it toxic, there is the chance that every time a negative piece of housing data comes out in the future, Treasuries could actually sell off vs. rally because that’s more bad paper that the US Gov’t must make good, guaranteeing payments to these investors. If we are in the early innings of this housing meltdown like many including myself think we are, then get ready for sky-high Bond yields because the only way to cover all of investors around the world will be through the sale of new Bonds.