U.S. Bond Yields

From Reuters: Rising U.S. bond yields may spark Credit Crisis II


The global financial crisis may morph into a second, equally virulent phase where borrowing costs rise again, hobbling an embryonic economic recovery, debilitating cash-strapped banks, and punishing investors all over again.

Early warnings signs of this scenario include surging government bond yields, a slumping U.S. dollar, and the fading of the bear market rally in U.S. stocks.



The telling harbinger is benchmark Treasury note yields' surge to six-month highs around 3.75 percent this week, as investors began to balk at the record U.S. government borrowing requirement this year.

The U.S. Treasury plans to sell about $2 trillion in new debt this year to fund a $1.8 trillion fiscal deficit.


The positive correlation between Treasury yields and mortgage rates may hinder mortgage recovery.


"The interest rate rise this week is very troubling for the housing market," said Ronald Temple, co-director of research at Lazard Asset Management in New York. "It raises the cost of purchasing a home at precisely the time when we have large excess supply of homes hitting the market."

The surge in 30-year mortgage rates to as high as 5.5 percent this week from 4.875 percent a week ago doused refinancing activity by homeowners who had been making applications at their fastest pace since 2003, brokers said.


The bond market, the value of the $USD, and mortgage rates operate in tandem. Manipulation of one of these facets creates unintended ripple effects.

Hedge Funds speculate that Obama's policies will backfire.

"The basic strategy appears to be to try to bring us back to 2006 by propping up asset prices and reflating the popped credit bubble, subsidizing bank creditors and shareholders, and delaying needed bank recapitalizations while hoping for an economic recovery," Greenlight Capital's David Einhorn said at the annual Ira Sohn Investment Research Conference.



Peter Schiff of Euro Pacific Capital, who in 2006 publicly warned the subprime crisis would drag down financial markets, said Obama's policies will only re-inflate the credit bubble.

"As any drug addict knows, if you stop using drugs you will go through withdrawal. Government is making the situation worse," said Schiff. "We don't need any more stimulus. We are suffering from the stimulus we have already been given."

He joked years of misguided U.S. fiscal policy has created a Ponzi economy, where new Treasury bonds must be sold to repay existing investors just to keep Uncle Sam solvent.



Subject Meta: 

Forum Categories: 

reinflating the bubble

It does seem corporations (in cahoots with the government) are trying to get things "back to where they were" which is a bubble, debt laden economy.

But foreign investors charging more money to buy U.S. debt...this is a major concern to me.

I think deficit spending, this is another issue that I don't believe was around in the 1930's, that one was so vulnerable to foreign nations when running deficit spending...

Seems like this goes into a national security issue, i.e. other nations can bring the U.S. down through economic war in so many words.

I don't have any answers and it would be nice to see some sort of CBO/GAO style analytic report on the probability of the above predictions. (if that's even possible to do?)

We already have an economic war

North Korea/Darfur - It's 1956 and the Suez Canal.

As for probabilities - any statisticians around?

Going Up?

By this time, most of the cash freed-up by the sale of equities made during last year's crash has been committed to some format or other, governments, very short term corporate paper where attractive enough, etc. It seems to me that the only buyers of substance still out there are likely to be foreign government entitites. To get these players to the table given the obvious begging inherent in such large offerings will require yields significantly higher than were contemplated originally.

While I've not been critical of fiscal stimuli in principle understanding going in that choices are being made which just might by accident actually favor the little guy in the few instances when pork isn't involved, the cost of the pork to achieve this result ultimately will be quite damaging. Keep in mind always that we've turned management of these questions over to thieves and must therefore expect the morality of thieves to guide the processes involved. Strange as it may seem on its face at the moment, I would expect to see much higher interest rates in the near term coupled with an early return to $4.00/gallon gas prices. And guess whose teat gets caught in that ringer? It won't be Dr. Scalple, Director of Surgery at Johns Hopkins. Dr. Scalple's services will still be in demand enough and Dr. Scalple personally will be able to sound professorial enough to hold on to his inflation proof, $350,000 annual salary. Nope, it'll be some high school educated, 30 year old, white working class schlub with a wife and three kids in Canton, Ohio, laid-off from his job at the local aluminum fabricating plant a year ago and currently delivering pizzas in an economy car on Cavs game nights. That's when things will really start to hurt and a lot of today's public willingness to acquiese in this criminality will come to an end. Hope begins at that point.

Though I applaud your well-framed comment

I am not so optimistic.

From the The Economist

The same old dilemma will eventually occur. Having spent a fortune bailing out their banks, Western governments will have to pay a price in terms of higher taxes to meet the interest on that debt. In the case of countries (like Britain and America) that have trade as well as budget deficits, those higher taxes will be needed to meet the claims of foreign creditors. 

The working class schlub and especially his 3 kids will be paying a fortune in taxes before they realize they have been robbed.


A Before Tax Concept

Thank you for the kind remarks.

When I speak of hope above, it is the hope that somehow the very system that has caused and then bequeathed us these horrors - a system whose publically advertised "democratic processes" have become so subverted by an unprincipled collusion between lobbying interests intent on controlling them on the one hand and politicians eager to be owned by these same interests on the other - is brought to an end. Ask yourself how representative of the peoples' sentiments an almost unanimous congressional vote to endorse an AIPAC authored resolution setting up the preconditions for war with Iran was last year. As long as AIPAC and the financial and defense lobbies can determine who holds office in Washington, you and I can't. To call the present system as corrupt as it is in this way a "parliamentary democracy" is utter nonsense. The whole affair needs to be set aside and rebuilt from the ground up. Perhaps our 30 year old schlub in Canton together with hundreds of thousands of others like him will see to that happening prior to any upcoming levying of new taxes. Can we hope?

Hope is not enough.

We have been 'dummied down' as a country. Our critical thinking skills have been several damaged. If we can repair our critical thinking skills then there is hope. Otherwise, we continue to have huge disparities of income with the "have nots" fooled into fighting amongst themselves for crumbs while the "haves" enjoying their summers in the Hamptons.

There is one bible passed I absolutely truly believe in:

Blessed are the meek: for they shall inherit the Earth

I just hope I am on the side of the meek when they do.