Anyone still arguing in favor of deflationary forces resulting from the financial crisis should think again. Here’s why…
A report submitted to Treasury Secretary Geithner (by the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association) acknowledges that the steepening yield curve may be a direct by-product of the extraordinary funding requirements in 2009-2010.
Funding needs are based upon expectations of weaker economic growth and Congress and the Administration’s stimulative policy actions. Increased TARP expenditures, potential FDIC guarantees, and additional fiscal "stimulants" could push government funding needs to $2 trillion.
Under such a scenario, Americans are looking at Treasury funding requirements being the largest percentage of GDP since the post-war era.
Intermediate-term technical analysis of long-term treasury yields (see charts below) supports the probability of rates rising above 4% before encountering any significant resistance. Meanwhile, the U.S. Dollar’s days of basking in the "flight-to-safety" trade appear to be over as (see charts below) the Dollar is no match for long-term rising rates on a relative basis.
The bottom line: If this situation persists, expect the Gold Trust ETF (GLD) and the UltraShort 20+ Year Treasury Bond ETF (TBT) to continue their superior market performance. Another security that stands to benefit under these same market conditions is the U.S. Dollar Bearish Fund ETF (UDN). If the dollar breaks down, the UDN should appreciate due to its negative correlation to the U.S. Dollar index.
Disclosure: Author is long GLD and UDN.
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