Why US treasuries are trembling ahead of key Fed committee meeting

Speculation the US is preparing to print more money has pushed the yield on its government debt to new lows, a sign that the world's largest economy may be flirting with Japan-style deflation.

Fears US rate-setters may be readying to pump more money into the US economy has pushed the yield on US government bonds (Treasuries) to new all-time lows and provides an uncomfortable warning of what could happen in the UK.

Growing worries the US economic recovery is stalling pushed the yield - the return an investor can expect - on two-year US government bonds to an all-time low below 0.5% last week. Meanwhile the yield on benchmark ten-year Treasuries hit the lowest level since April 2009 as investors readied themselves for a critical meeting tomorrow evening of the Federal Open Market Committee (FOMC), the body that sets US interest rates. 

Inflation has fallen to a 44-year low in the US and the fact that the yield on the benchmark bond is trailing back near levels they were at when the US government first started injecting cash into the US economy suggests the market is once again worried the US may be about to enter a period of falling prices or deflation.

Central bankers say more stimulus is needed

Central bankers and economists fear the US could face a ten-year battle to get itself back on the road to sustainable growth - which is what happened in Japan in the 1990's - and why many agree the authorities have no choice but to throw more money at the problem now.

Talk the US may be ready to add more stimulus took hold after former and current members of the FOMC suggested they are increasingly worried the US is heading for a period of deflation.

Among them is Federal Reserve Bank of Saint Louis President James Bullard who wrote an article about why he fears the US may be heading for a period of deflation.

Separately, a former member of the Federal Reserve Vincent Reinhart said he believed the US will introduce more quantitative easing before November.

The fears reached fever pitch on Friday after what most agree was a particularly disappointing jobs report. This showed the private sector created just 75,000 new jobs in July, suggesting the private sector is incapable or unwilling to take up the slack as government jobs are lost.

'QE' in focus

Andrew Roberts, head of credit at RBS, said that further quantitative easing (creating new money) in the US ‘has suddenly become all that investors want to discuss’.

For now, few economists think the FOMC will rush into a major change of policy this week but investors and economists alike suggest there may be some changes in the language of this week's statement.

The FOMC's statements are scoured as every single change to wording has a clear meaning about the state of thinking of committee members.