Treasury Rates Heading Up

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Quercus bicolor's picture
Quercus bicolor
Status: Gold Member (Offline)
Joined: Mar 19 2008
Posts: 470
Treasury Rates Heading Up

Has anyone been keeping up on what's happening in the Treasury market lately?  I notice interest rates on the 10 year bond have been heading back up to nearly 3% since April 1 in a way that is doesn't seem justified given the moves in the stock market.  Or is everyone selling gold to buy treasuries?

Steve

strabes's picture
strabes
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Joined: Feb 7 2009
Posts: 1032
Re: Treasury Rates Heading Up

generally the biggest moves in the bond market are about risk preferences (shifting between US bonds (low risk) and higher risk asset classes) and inflation/deflation expectations (traders riding the yield curve).  since apr 1 it appears that there has been 1) slightly increased risk preference (equities up, TED spread down, bonds down) and 2) riding the curve to the short end.  but the move since apr 1 isn't big enough to signal much of anything.  it really has nothing to do with the gold market since it's so small compared to bonds.

 

that1guy's picture
that1guy
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Joined: Jan 11 2009
Posts: 333
Re: Treasury Rates Heading Up

Strabes,

 You know, I'm sure you'll warn us about any big red flags in the bond market....I gotta tell ya I have learned a lot and picked up an awesome perspective on the bond market from chatting with you. It has helped put many things I have read into place.

I have another question for you...I dont think I asked yet. Hypothetically speaking (although I guess not so hypothetical) If Obamas crazy budget goes through, and the Treasury swamps the market with bonds do you feel that will cause a collapse in the market? When I say collapse, I am not referring to not paying, I'm referring to a collapse over time by way of inflating their way out. Hopefully I worded that right. I just wonder what your perspective is being that you follow the bond market so closely.

Thanks!!

Mike

plantguy90's picture
plantguy90
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Joined: Jan 26 2009
Posts: 271
Re: Treasury Rates Heading Up

Strabes,

Whatr your thoughts on the 10-30 yrear rates trading back to pre-Fed-buys-long-bonds-outright announcement? 

Combatting deflation by printing money out of thin air seems to have its detractors in the bond market... 

 

 

 

strabes's picture
strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: Treasury Rates Heading Up

that1guy - yes an exponentially growing budget isn't good, yet creditors have demonstrated a willingness to finance an absurd level of insanity thus far (for the last 70 years).  nobody seems to know where the breaking point for this debt-based empire is, but once the Fed senses the breaking point is being reached via their daily interactions with the primary dealers and other big buyers, they will no doubt jack up short term rates to cool the economy even more, keep the yield curve appropriately shaped, and the politicians will be forced to cut outlays or risk the run on Treasuries nobody wants to see.

plantguy - true all other things being equal, the Fed's announcement has an inflationary bias so rates went up, but they went up only slightly in the larger scheme of things.  that's what the Fed wanted...drive rates to slightly less deflationary levels. rates are still well below the normal level...10 years usually hover just under 5%.  had rates shot up above 5% after the Fed announement, then that would've been a real problematic signal.

 

 

plantguy90's picture
plantguy90
Status: Gold Member (Offline)
Joined: Jan 26 2009
Posts: 271
Re: Treasury Rates Heading Up
strabes wrote:

plantguy - true all other things being equal, the Fed's announcement has an inflationary bias so rates went up, but they went up only slightly in the larger scheme of things.  that's what the Fed wanted...drive rates to slightly less deflationary levels. rates are still well below the normal level...10 years usually hover just under 5%.  had rates shot up above 5% after the Fed announement, then that would've been a real problematic signal.

I'm not following your logic.  The Fed's announcement was intended to drive yields down, but they were marginally sucessful, in fact, the more they buy, the more yields stay the same, with that building upward bias.  How long can they hold down the lid with that paper money?  The market is all too willing to pass those bonds to the last sucker. Is that what the Fed wants, the market to brush off their last desperate tool? 

The yield curve merely reflects the safest, lousiest return in the market, and is therefore set by economic forces.  So the "historical" peg of the 10-yr to mythical point, say 5%, is meaningless, if you factor in all the stuff from the CC.

I agree with you, that its a deflationary period until the inflation monster roars, but the timing of the loss of faith isn't that far off, IMO.

The analogy to Japan is a mistake; USA, aka the West is not a homogeneous, docile society, its driven by individualism, which translates to "what's in it for me."  When Japan crashed, its bankers did not immediately begin looting, and its people did not immediately demand handouts - while here its going to take a lot of bread and circus. 

It appears to me is that rates are laughing at the attempt by Ben & Company to contain them, for revival of lending purposes.  Sure when the Fed buys it goes down, but then floods right back up.

What do you think? This rebuttal isn't meant to be antagonistic, I value your perspective and enjoy the discussion over interest rates, and I wanted to feed these thoughts into your computer.

 

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1234
Re: Treasury Rates Heading Up

PlantGuy,

I completely agree with what you say in this post. However, there's another aspect to this that you didn't mention: So far, every time something is only marginally effective, the Fed has just thrown more and more money at the problem.

So it seems to me that we should expect alot of vol in treasuries. It would go something like:

  • The Fed tries to pull rates down by buying treasuries. It works a little bit at first, so rates come down just a little (they are still below their pre-announcement levels now, despite having crept back up since the announcement).
  • The market responds with "we'll sell you all the crap paper you want to buy with your freshly printed money! We were already looking for a way to dump our treasury positions without shocking the market, and you just provided it, Ben. Thanks!".
  • As the selling picks up in the market, it overpowers the monetization buying and yields creep back up slowly as has been happening for the past week or so
  • Next, the fed will decide it needs to be more aggressive, and up the stakes by announcing Monetize II (akin to TARP II), and commit another $300B (or maybe $500B) to treasury monetization. This announcement will instantly shock rates back down, just as the announcement of Monetize I did. At first, that is.
  • The market will have the same reaction, and the cycle repeats... 

The only thing that would break this vicious cycle would be thoughtful, responsible, coherent thinking on the part of the Fed, and the recognition of the fact that Monetize I was a dumb idea to start with. Don't count on that happening.

The really scary part is that if they really start buying in a big way, and that causes the sellers to really start selling in a big way, if the Fed eventually stops buying, the sellers may just continue selling. That's when the market implodes and yields blow out into double-digit territory, never to return.

Erik

 

that1guy's picture
that1guy
Status: Gold Member (Offline)
Joined: Jan 11 2009
Posts: 333
Re: Treasury Rates Heading Up

Erik, planetguy,

I tend to agree here as well. If their intended purpose was to keep rates low for the housing market, and yet they are already rising (even though below the norms) chances are they are going to monatize more.

Strabes, (and all others Tongue out )

Unfortunately, although you are right in that they will need to raise rates, their actions seem to show the complete opposite. Now, to add on top the budget I was hypothetically looking at may not be so hypothetical (as I'm sure we all thought). 

http://www.campaignforliberty.com/article.php?view=43 

It looks like the budget passed the house.......

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