We have advocated three main explanations as to why bond yields have declined: 1) lower inflation, 2) slower growth, and 3) a (relative) flight to safety. In addition, we think there may be another plausible explanation. Michael Pettis, a finance professor at Peking University's Guanghua School of Management, suggests that with Chinese trade surpluses rising again (as US trade deficits widen) "the more capital [China] must invest abroad." He posits that a 'capital tsunami' is coming to the US - to a lesser extent this is also coming from other net exporters such as Germany and Japan. In other words, it appears the world's major net exporters are trying to once again position the US as the consumer of last resort and, in the process, accumulating Treasuries and driving their yields lower. If US trade deficits continue widening, we believe this is increasingly likely to result in trade friction

David Fuller's view China and Japan will recycle capital from their trade surpluses with the US into Treasuries but my understanding is that most of this is invested in short to medium term durations, rather than long-dated instruments. Also, I do not think that any country could "position the US as the consumer of last resort", because it is not within their power to do so. Instead, much of what American consumers wish to buy is manufactured in China and Japan. (See also my comments on long-dated bonds in he lead item above.)