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.