Bonds beaten with the ugly stick

Is there a bubble in Treasuries? I think so, as I have written in a few places. Whether that's the case or not, though, it's clear that bonds are currently getting beaten with the ugly stick. The long bond futures have fallen as much as three points in price today, following a 2 18/32 beating on Friday and a 3 12/32 pounding on New Year’s Eve. The cash long bond has dropped roughly 11 points in price in just three trading days.

What's driving the sell off? Is it the return of risk taking by investors (i.e. money moving out of Treasuries and into risk assets, such as other bonds and stocks)? Is it the end of artificial year-end buying, which may have temporarily bolstered Treasury demand? Or is it ongoing fears about the size of the budget deficit and the economic stimulus package, which will need to be funded by the sale of hundreds of billions of dollars worth of Treasuries (including $54 billion of three-year and 10-year notes this week alone)? Probably a combination of all three.

As a complete aside, I recommend everyone have a look at this Op-Ed piece from the New York Times entitled "The End of the Financial World As We Know It." Nice work there, with some sensible recommendations about how to prevent future financial catastrophes like the one we're coping with today.