Treasuries closed at 3.03% today....

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r101958's picture
r101958
Status: Martenson Brigade Member (Offline)
Joined: Aug 24 2008
Posts: 257
Treasuries closed at 3.03% today....

I've heard that this is big because the Gov't had been trying to keep this figure below 3%. I would be interested to read any thoughts out there as to the ramifications of this? Does it mean we are one step closer to default?

r101958's picture
r101958
Status: Martenson Brigade Member (Offline)
Joined: Aug 24 2008
Posts: 257
Re: Treasuries closed at 3.03% today....

Sorry, failed to mention this is the 10 year treasury.

Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Offline)
Joined: Apr 22 2008
Posts: 547
Re: Treasuries closed at 3.03% today....
r101958 wrote:

Does it mean we are one step closer to default?

I think increasing yields are significant, but I don't think it means we are one step closer to "default."  Well, 1/100th of a step closer maybe.

Increasing yields means decreasing prices which means decreasing demand relative to supply.  Increasing yields also means increasing interest rates.  Increasing interest rates are very bad for the Fed's plan to pull the country out of a deflationary nosedive.

I look at this issue as a slippery slope problem.  Someone tell me how I am wrong:

1.  Fed-government want to pull country out of deflationary nosedive.

2.  This plan requires all sorts of shenanigans, including bailouts and spending up the kazoo and doing other things to try to drive the economy foward or at least not let it fall into a black hole.

3.  Combined with falling tax receipts, this requires borrowing up the kazoo in the form of treasury sales.

4.  BUT, the plan is flawed because it also requires keeping interest rates artificially low.  This means that yields cannot be allowed to rise significantly.

#3 and #4 conflict.  They are in conflict because supply/demand dictates that the natural yield level is quite a bit higher than the yield the Fed wants for purposes of interest rates.  Are you with me so far?

5.  There is simply not enough foreign demand for the treasuries without allowing yields to rise to their natural levels.  So,

6.  The Fed buys Treasuries themselves with printed money.  This soaks up demand and keeps yields low.  But,

7.  Legitimate buyers know exactly what the Fed is up to.  So,

8.  They quit buying treauries at an artificially low yield.  So,

9.  The Fed has to buy more treasuries.  So,

10.  More legitimate buyers flee.  So,

11.  The Fed buys more treasures.  So,

12.  Even more legitimate buyers flee.  So, at the end of the day,

13.  The Fed ends up holding the entire @&$&*(@ debt.

r101958's picture
r101958
Status: Martenson Brigade Member (Offline)
Joined: Aug 24 2008
Posts: 257
Re: Treasuries closed at 3.03% today....

Thanks Lemon....very well put and not far from what I had heard and am thinking. I noticed the yield fell to 2.51 when the Fed announced it was goikng to start buying treasuries. Since then it seems to have become a losing battle for the Fed to try to keep these rates low. It appears that the only time the yield falls is after the Fed has purchased some. However, each succeeding time the yield falls less and then goes up again even more quickly.

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