Wednesday, December 8, 2010

Ten Year US Treasuries Touch 3.30%

Absolutely fascinating behavior in the bond market as the market seemingly has overwhelmed Ben Bernake's QE2.  Just a week ago Treasuries hit 3% [Dec 2, 2010: 10 Year Treasury Yields Hit 3%, Levels Last Seen in July], so we've seen a 10% increase in such a short amount of time - even as Bernanke and Brian Sack are busy buying bonds (slightly shorter duration mostly) each and every day.  That is supposed to increase the prices of bond (and inversely drop yields).

(chart has a one day delay)

The situation in Europe and push-pull between one hot stinking mess and another (ours), makes it hard to figure out what exactly this move is saying.  Our yields are probably lower than they should be, as people fled Europe so is this a return to mean move or is it speaking to something larger?

Generally yields are going to rise because (a) inflation expectations are rising and/or (b) the future view of the economy is improving and/or (c) a country is acting in a profligate manner in relation to its finances.  Certainly could be all 3, 2 out of 3, or just 1.  Since the $900B over 2 years spending gusher announced Monday night, yields have shot up big time.  I think the rest of the world might now understand we are not serious at all about deficit fighting and our commissions are for show.  Remember, just keeping the bush tax cuts for another decade will increase our debt load by $4 trillion alone.  That completely offsets ALL of the deficit commission's austerity solutions - meaning if we passed the 2001/2003 tax cuts AND did every single recommendation we'd only be flat in terms of debt.

And you know what path we are going to choose - 2001/2003 tax cuts forever (yes) deficit commission recommendations (only a few and most will be 2040+)

But maybe I'm wrong and the 3.7% GDP that Goldman sees for 2011 post "don't call it a stimulus plan" is what we are getting giddy over.  Either way keep an eye on this, even Greenspan said last week the first thing he looks at each day is 10 year yields.  (I thought the answer might be Andrea Mitchell, but apparently 10 year yields over wife)

With a country totally dependent on easy money in every facet of society, if we see yields in the low to mid 4%s next year (perish the thought of 5% ten years), a lot of very "interesting" things would take place.  On a side note, each tick up in yield means the value of all those treasury bonds smoldering on the fed balance sheet falls - incurring losses.  But no worries - Ben says it is not the taxpayer's money.

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