Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Silver Outlook Is 'Excellent' - 23rd July 19
Why The Coming Silver Rally Might Be The Greatest - 23rd July 19
We Are in for Decades of Ultra-Loose Monetary Policy - 23rd July 19
Gold & Gold GDX Stocks Ripping. What’s Next? - 23rd July 19
Stock Market Breadth Warning Signs for the Stock Market’s Rally? - 23rd July 19
U.S. Recession Watch: The Six-Cycle Forecast - 23rd July 19
US Dollar Index tightly wound between: US Bond Yields down on safety flows - 23rd July 19
Stocks Bull or Bear? The Market’s Message - 23rd July 19
This Dividend Aristocrat Is Leading the 5G Revolution - 22nd July 19
What the World Doesn’t Need Now is Lower Interest Rates - 22nd July 19
My Biggest 'Fear' For Silver - 22nd July 19
Reasons to Buy Pre-Owned Luxury Car from a Certified Dealer - 22nd July 19
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

U.S.Treasury Bonds in the Eye of the Financial Storm

Interest-Rates / US Bonds May 31, 2009 - 08:45 PM GMT

By: Money_and_Markets


Best Financial Markets Analysis ArticleBryan Rich writes: The U.S. Treasury bond market has become the focal point of financial markets for the past several trading days. And when Treasury bonds move, so does the dollar.

Market participants are looking for consensus on the penalties that may be levied on the U.S. government for its bailout and stimulus policies. Penalties in this case are expressed in lower demand for Treasuries and therefore, higher interest rates to attract demand.

Not a Normal Environment …

In normal environments — when the global economy is stable, the financial system is stable and advanced economies are growing — higher rates are a recipe for a stronger currency. That means the U.S. dollar would benefit from such an aggressive move in interest rates, as investors seeking higher yields flock to the Treasury market and the U.S. dollar. The climb in interest rates would typically be associated with a central bank that is attempting to cool off inflationary pressures from an expanding economy.

In normal environments, rising interest rates are a recipe for a stronger currency. But that’s not what’s happening now ...
In normal environments, rising interest rates are a recipe for a stronger currency. But that’s not what’s happening now …

That’s certainly not the case now …

Yes, interest rates are rising. The yield on the 10-year Treasury note leaped from 2.45 percent to 3.75 percent in just 10 weeks. But it’s not growth that’s driving yields on U.S. government debt … it’s inflation fears! Therefore, the dollar has been under pressure.

The U.S. government is adding trillions of dollars in new debt. And according to the IMF, the debt level in the U.S. is expected to surge from 63 percent of GDP in 2007 to nearly 100 percent of GDP by 2010.

But the dollar-bears and hyper-inflation theorists shouldn’t get too excited. In the worst global recession since World War II, inflation is not the problem. It’s deflation. Inflation will be a concern when all of the structural issues have been fixed, employment recovers and the money being printed turns into consumption.

Furthermore, considering the global scope of the economic and financial crisis, and similar policy actions taken by major governments, pinpointing U.S. specific problems only exposes the greater dangers to the global economy.

For now, Moody’s has quickly countered any speculation that the credit rating of the U.S. government debt was in jeopardy. The ratings agency endorsed the strengths of the U.S. economy and reaffirmed its top credit rating status.

And for a reference point in evaluating the impacts of quantitative easing and increasing debt loads in a crisis response, take look at Japan’s experience …

In 2001, the Japanese economy was suffering from its third recession in a decade, deflation, and a banking system crippled by bad loans. Japan moved short term interest rates to zero and then began a quantitative easing program.

The stimulus response meant government spending programs that pushed debt levels in Japan to 130 percent of GDP by 2002. And Japan spurred a government bond bubble through its government debt purchase program that later popped.

Sound familiar?

The result, however, was not inflation or devaluation in the yen. To the contrary, their currency strengthened. And over the course of the next five years, the Japanese economy began its longest period of growth since World War II — albeit export driven.

Debt Ratios Rising Everywhere …

The leading global economies are in repair mode, and it’s being paid for with more debt. So, on a relative basis, debt to GDP levels are expanding in most major economies as shown in the table below…

General Government Gross Debt as % of GDP
United States
United Kingdom
*IMF estimates

Higher Interest Rates are a BIG Problem for the Recovery Scenario …

'One in every eight Americans is now late on a payment or already in foreclosure as mounting job losses cause more homeowners to fall behind on loans.'
“One in every eight Americans is now late on a payment or already in foreclosure as mounting job losses cause more homeowners to fall behind on loans.” —Mortgage Bankers Association

The Fed has bought about $500 billion of debt to expand the money supply and force interest rates (particularly mortgage rates) lower, a feat that was going well until last week. Now mortgage rates are back above 5 percent, and billions of dollars worth of work by the Fed has been erased.

Even with manipulated mortgage rates, which went as low as 4.8 percent from 6.5 percent just nine months ago, the number of mortgage delinquencies and foreclosures hit record levels in the latest report. Now prime fixed-rate foreclosures are outpacing subprime.

This inflation scare and climbing interest rate scenario puts increased pressure on an already fragile domestic and global economy and increased pressure on the Fed. Moreover, a continued deterioration in the U.S. housing market is:

    • Not good for the U.S. consumer,
    • Not good for export-driven global economies,
    • Not good for the global financial system.

    Rather, it prolongs a problem that is at the core of the financial and economic crisis and exposes financial markets to more risk — just when the general sentiment is getting more optimistic.

    All of the economists polled by the National Association for Business Economics predict the recession to end by the first quarter of 2010. It’s this type of optimism that is feeding the risk appetite of investors. And it’s this type of optimism that creates increased vulnerability in financial markets to a negative surprise.

    With the growing complacency, another dip in this global recession could create some very gun-shy investors, a return to risk aversion and another leg higher in the dollar.



    This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit .

    Money and Markets Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules