…Recently, yields on the 10-year U.S. Treasury Note have climbed sharply higher. Today, the yield on the 10-year U.S. Treasury Note is around 2.67 percent. While this is still a very low yield it should be noted that it has spiked higher by more than 1.25 percent since bottoming in July 2012. The yield chart of the 10-year U.S. Treasury note is signaling a move to 3.0 percent in the near term, so it would be prudent to expect bond prices to continue to fall. Yields are moving higher despite the Federal Reserve buying $40 billion a month in U.S. Treasuries. Is the bond market trying to tell us something? There is an old saying on Wall Street that the bond market is smarter than the stock market. You see, the people that run the bond market have much more capital than the people that buy stocks. Remember the old saying, follow the money.
If the bond market is moving higher it is telling us that the Federal Reserve is going to need to taper their current QE-3 program very soon. If they do not taper soon then they are risking another bubble or perhaps massive inflation. The Federal Reserve’s balance sheet is now around the $4 trillion level, so perhaps that is the next bubble to burst. Either way, everyone should keep an eye on the bond market as it always tells us what is really happening before it does.
http://mrtopstep.com/2013/08/if-bernanke-does-not-taper-soon-the-bond-market-will-force-him/
Inflation Expectations Determine Investors Yield Requirements
Inflation is a bond’s worst enemy. Inflation erodes the purchasing power of a bond’s future cash flows. Put simply, the higher the current rate of inflation and the higher the (expected) future rates of inflation, the higher the yields will rise across the yield curve, as investors will demand this higher yield to compensate for inflation risk.
Short-Term, Long-Term Interest Rates and Inflation Expectations
Inflation – and expectations of future inflation – are a function of the dynamics between short-term and long-term interest rates. Worldwide, short-term interest rates are administered by nations’ central banks. In the United States, the Federal Reserve Board’s Open Market Committee (FOMC) sets the federal funds rate. Historically, other dollar-denominated short-term interest, such as LIBOR, has been highly correlated with the fed funds rate. The FOMC administers the fed funds rate to fulfill its dual mandate of promoting economic growth while maintaining price stability. This is not an easy task for the FOMC; there is always much debate about the appropriate fed funds level, and the market forms its own opinions on how well the FOMC is doing.
http://www.investopedia.com/articles/bonds/09/bond-market-interest-rates.asp
http://www.investopedia.com/articles/03/122203.asp
It appears the bond market may have had enough of Bernanke’s talk. Is Bernanke getting the message?
http://globaleconomicanalysis.blogspot.com/2013/08/treasury-yields-surge-following.html#Qg9HJHwK9EzGKPAP.99
Art Cashin Video: Rates ‘dangerously close’ to ‘tripwire’
http://www.cnbc.com/id/100933167
The Most Important Number In The Entire U.S. Economy
There is one vitally important number that everyone needs to be watching right now, and it doesn’t have anything to do with unemployment, inflation or housing. If this number gets too high, it will collapse the entire U.S. financial system. The number that I am talking about is the yield on 10 year U.S. Treasuries. When that number goes up, long-term interest rates all across the financial system start increasing. When long-term interest rates rise, it becomes more expensive for the federal government to borrow money, it becomes more expensive for state and local governments to borrow money, existing bonds lose value and bond investors lose a lot of money, mortgage rates go up and monthly payments on new mortgages rise, and interest rates throughout the entire economy go up and this causes economic activity to slow down. On top of everything else, there are more than 440 trillion dollars worth of interest rate derivatives sitting out there, and rapidly rising interest rates could cause that gigantic time bomb to go off and implode our entire financial system. We are living in the midst of the greatest debt bubble in the history of the world, and the only way that the game can continue is for interest rates to stay super low. Unfortunately, the yield on 10 year U.S. Treasuries has started to rise, and many experts are projecting that it is going to continue to rise.
On August 2nd of last year, the yield on 10 year U.S. Treasuries was just 1.48%, and our entire debt-based economy was basking in the glow of ultra-low interest rates. But now things are rapidly changing. On Wednesday, the yield on 10 year U.S. Treasuries hit 2.70% before falling back to 2.58% on “good news” from the Federal Reserve.
Historically speaking, rates are still super low, but what is alarming is that it looks like we hit a “bottom” last year and that interest rates are only going to go up from here. In fact, according to CNBC many experts believe that we will soon be pushing up toward the 3 percent mark…
http://theeconomiccollapseblog.com/archives/the-most-important-number-in-the-entire-u-s-economy
http://www.zerohedge.com/news/2013-08-01/trannies-top-bonds-bottom-credit-crumbling
Long Dated Bonds Surge To 3.77% – 2 Year Highs
Equities appear to be celebrating the bond market’s rapid collapse today but there are already unintended consequences. With the entire complex seeing yields spike the most in a month (cracking back above yesterday’s post-FOMC spike highs), 30Y yields have broken to new two-year high levels at 3.77%. As rates rise, issuers are struggling. Whether it is because of Detroit concerns or the sell-off in bonds, Michigan’s Genesee County just pulled its $53mm muni offering as “investors wanted a much higher interest rate than the county wanted to pay.” The offering didn’t attract buyers for a 29-year bond, the longest maturity in the deal, at an interest rate or 5.34%. Perhaps they should have issued stock?
http://www.zerohedge.com/node/477111
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