US Vice President was accidentally overheard using an expletive in describing the importance of signing the health care legislation by President Obama. And whether or not you agree that the health care legislation was a good idea, people on both sides feel very strongly about it and hence it is … big. (Expletive excluded).
There is something else though in the financial markets which could also be a big … deal. And that is booming bond yields. Wednesday’s Treasury bond auction did not go too well and yields on the 10 Year Treasury reflect that. See the chart (courtesy of Yahoo Finance) below:
The 10 Year Yield has been moving closer to the 4% level. If this level were breached materially, it could have a run to 5%. 4.30% seems to be the area of resistance from which this yield has been repelled. The action Wednesday, with yields on this benchmark jumping by 0.13% to 3.82%, is a large move.
US Treasuries have much going against it. On known hurdle it needs to leap includes the Fed halting its purchases of mortgage and Treasuries. The Fed is scheduled to stop its quantitative easing (or bond purchases) on March 31st. It has stated on multiple occasions that it will keep that date. Currently, yields are moving up even though the Fed is still a large buyer in the bond market. What will happen to bond yields when the Fed is gone? Booming Treasury yields could be … big.
A second large hurdle the bond market faces is the massive deficits that the Federal government is running. The US went from a deficit in 2008 that was $400 billion to one that is around $1.4 trillion in 2010. The deficit needs to be funded via the bond market. Will the US bring down its deficit in the coming years? If not, what will that do to Treasury Yields? Booming Treasury yields could be … big.
The last hurdle that the Treasury market faces is the cost of health care just passed. There are all sorts of estimates flying around. Some estimates call for a reduction in the deficit in the years to come. I am not so sure about this. I think Bill Gross said it best in his missive Wednesday that “logic says that paying health care for 30 million Americans is going to cost money.” Mr. Gross mentions that a former CBO chair estimates that the cost will add at least $550 billion to the deficit over the next 10 years. If this is accurate or if this estimate turns out to be conservative, what will happen to Treasury Yields? Yes, VP Biden, booming Treasury Yields could be … big… big for American consumers, corporations and governments.
Authored by Tom Henderson, Strategist JBH Capital.
Disclosure: There are no disclosures to make.
