More trouble may be brewing for credit markets in the upcoming year.  The growing fear of inflation has caused many large institutional investors to pump money into the commodities market, forcing prices upwards as the market becomes over saturated. 

The assault on the dollar in exchange markets has not helped either.  This is a huge problem with so much of our nation’s debt being held overseas.  Foreigners are becoming more  and more reluctant to hold U.S. Treasury Securities. 

Right now, the annualized rate of inflation is higher than the yields offered on Treasury Bills.  A number of central banks have expressed dismay at this and many foreign entities are considering drawing down their stocks of  dollars and dollar denominated assets.

I wrote about this type of scenario back in November when China was threatening a massive sell off of U.S. Treasury Notes as retaliation for proposed trade sanctions.  If the fixed income market becomes flooded with Treasury Securities, prices will tumble and send long term interest rates soaring.

Once it starts, it could become a domino effect, forcing other entities to get out of dollars before it’s too late.  The effect on future economic growth could be devastating.  If you think it’s hard to find credit now, you haven’t seen anything yet.