What's Behind Soaring T-Bond Yields?

Many market observers have been alarmed by the surge in long-term bond yields. This has also sparked a debate on Wall Street: Are the higher yields due to an emergent recovery or fears of higher inflation?

For now, I don't think it's either. More than higher bond yields, we're really seeing a closing of the gap between Treasury yields and corporate yields. In other words, investors are more willing to take on risk. To be even more precise, the level of risk-taking is backing off from its extremely scared level of about six months ago.

This chart shows the yield of the 30-year Treasury (red) along with an index of AAA bonds (blue).

Notice the closing of the gap between the two. Corporate yields are higher but the major change has come from Treasuries. This means that the price of risk is finally returning to normal.

Comments

[Mad Hedge F...:]

How about massive supply. I have watched many countries go bankrupt over the years, as my collection of defaulted bonds hanging on my wall attests. Governments borrow so much that the cost of the debt service exceeds the national budget, so the country has no choice but to quit paying. I am starting to see disturbing parallels here. Bush took the national debt from $5 trillion to $12 trillion, and Obama will inflate it to $17 trillion by the end of 2010, boosting it to a frightening 82% of GDP. The cost of the borrowing is rising too. Today a 1% jump in bond yields raises the federal interest burden by $50 billion. The Congressional Budget Office says that figure will explode to $170 billion in ten years. Can you see the same hockey stick, hyperbolic, exponential growth in obligations that I do? Interest rates will soar to double digits, the dollar will crash, and private borrowers will get crowded out of the market, taking the economy into the tank. People blanche when I tell them that my target for the PowerShares US Lehman leveraged short government bond ETF (TBT) is $200, but the logic is inescapable.

Jun 18 11:55 AM

[zzhcct:]

This means that the price of risk is finally returning to normal.
--what i am interested in is the reasons for the mispricing of risk.
1) why do yields of treasuries revert?
2) why do yields of Aaa corporate bonds surged at then end of 2008, seems vilotating the normal situation...

Jun 19 01:52 AM

[zzhcct:]

the increasing costs of goverment borrowing-->larger fiscal deficit--> almost nothing to pay off-->higher yields or more greens-->....


On Jun 18 11:55 AM Mad Hedge Fund Trader wrote:

> How about massive supply. I have watched many countries go bankrupt
> over the years, as my collection of defaulted bonds hanging on my
> wall attests. Governments borrow so much that the cost of the debt
> service exceeds the national budget, so the country has no choice
> but to quit paying. I am starting to see disturbing parallels here.
> Bush took the national debt from $5 trillion to $12 trillion, and
> Obama will inflate it to $17 trillion by the end of 2010, boosting
> it to a frightening 82% of GDP. The cost of the borrowing is rising
> too. Today a 1% jump in bond yields raises the federal interest burden
> by $50 billion. The Congressional Budget Office says that figure
> will explode to $170 billion in ten years. Can you see the same hockey
> stick, hyperbolic, exponential growth in obligations that I do? Interest
> rates will soar to double digits, the dollar will crash, and private
> borrowers will get crowded out of the market, taking the economy
> into the tank. People blanche when I tell them that my target for
> the PowerShares US Lehman leveraged short government bond ETF (seekingalpha.com/symbo...)
> is $200, but the logic is inescapable.

Jun 19 01:54 AM