T-Bonds: 10-Year Yield Update

I must admit that I thought yields on T-bonds would be a lot higher by now. Despite the downward drift in yields since last June, I still expect them to move substantially higher, and today I breathed a sigh of relief. I was amazed at how complacent the bond market seemed to be, ignoring inflation signs such as $1000 gold and a falling dollar, and growth signs such as an across the board rise in commodity prices and sharp declines in swap and credit spreads (not to mention the surge in equity prices). My only explanation was that the market just couldn't believe that the economy would grow by any meaningful amount, even though it appeared to have avoided the calamity that was built into prices around the end of the year.

Then Bernanke gave a speech last night in which he seemed to hint that the Fed would be quicker to raise rates if the economy appeared to be on the road to recovery than he had previously hinted. Suddenly the bond market sat up and took notice: my goodness, there are some signs of recovery out there, so maybe it's not impossible that the Fed could raise rates sooner than we thought. Nominal yields are up about 13 bps across the curve as a result, while TIPS real yields are up by about half as much. This confirms that the market is raising its estimate of future economic growth as well as its estimate of future inflation, and both of those are consistent with my belief that until now, the market and the Fed have been underestimating the ability of this economy to grow, and underestimating the risk of rising inflation.

Full disclosure: I am long TBT at the time of this writing.

Comments

[ryanclarke:]

It's over. AS IN GAME OVER! The world has "defended" the dollar this week. What that means is the Asia-Pacific, European, and South American countries have chosen not to allow their currency to appreciate relative to the dollar. Bernake's game plan for the past year was simple ... keep the GREENSPAN inflation tactic working ... depress the 10 year T-Bill all the way to a 2% Yield or even better 1%, so all good U.S. citizerns could draw more equity, (dare I say blood?), out of their homes ... and go out and shop and consume until they drop ... because Bernake is determined to save the banks and the Fed via reflating the housing market. Instead, the world turned around and spit the 10 year Treasury out of their respective central bank coffers, (dare I say, coffins?), and out onto the open market and soaked up the dollar bills into their reserve banks ... Bernake was so hoping they'd allow the dollar to get into their econonomies and jack up oil prices sky high ... not that the middle east or Russia or the Euro nations or Mexico could profit like Goldman or Morgan from high oil prices. Now the open market is sitting on a bundle of 10 year U.S. treasuries which is why the yield on the 10 year leaped up today over 100 basis points. Bernake's going to have to quietly buy those 10 year notes back ... or the inflation will be obvious ... until the Fed publishes the money balance of their balance sheet... which the Fed is required to do by law ... showing an increase and not a decrease in money supply. So here is the final story. Everything the Fed has tried to do for the past year was a waste of time. The Fed has bought all the junk mortgage paper from every bank all over the globe and given them U.S. treasuries. That's what's on the Fed's books ... tons of worthless mortgage paper. The Fed is also will soon be sitting on a ton of treasury bills that no one ... the whole world over ... wants to touch ... and the U.S. banks have tons of money cash called dollars their not supposed to lend according to Bernake. What to do Bernake? What to do? I SUGGEST HE TAKE THE CASH AWAY FROM THE U.S. BANKS AND GIVE THEM THE OVERPRICED BONDS so all the mortgage paper on the Fed's books can be wiped out ... dollar for dollar ... because if he doesn't do that ... THE DOLLAR WILL BE WORTHLESS !!!!!!!!!!!!!!!!!!!

Oct 09 05:50 PM

[E Nuff Sed:]

The fact that unemployment in Canada (a lagging indicator) has started to go down clearly indicating the recession is definitely over. The US cannot be far behind.

seekingalpha.com/user/...

Oct 09 08:30 PM

[Michael Clark:]

I find RyanClarke's comments very interesting. Could foreign central bank support of the dollar derail Bernanke's plans to devalue the dollar and monetize the debt? Is this a different kind of trade war that is beginning? Love to hear other's comments on this.

Oct 11 04:41 AM

[ed233:]

Everybody knows what Mr. Bernanke's policies are about. The rest of the world is merely responding. That's why the dollar goes down and gold goes up. Mr. Obama has done nothing concerning change that will have benefits furthering a recovery for the US economy. Policies that use financial manipulation by creating worthless assets through the use of printing paper money, monotinizing and the use of non-transparent accounting principles will eventually bring the house of cards down. Using the dollar as a ponzi scheme is upsetting the international community which eventually weighs upon the ability of the US to flog massive amounts of worthless paper debt and I OWE U currency. Add to that a president whose policies of socialistic determination along with cap and trade money grab at a time when the US country is on its knees with the highest unemployed in recorded history spells disaster even for the once most industrious country in the world. LOL Looking after your money..

Oct 12 04:40 AM