Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Danger of U.S. Treasury Bond Market Collapse 2010!

InvestorEducation / US Bonds Jan 06, 2010 - 10:48 AM GMT

By: Martin_D_Weiss

InvestorEducation

Best Financial Markets Analysis ArticleIf you think 2010 is going to bring investors a carefree, nonstop ride to glory, think again!

Profit opportunities abound, and we intend to be among the first to lead you to them.


But we’re also here to give you advance warnings of threats that can sneak up from behind and catch you by surprise.

Case in point: The danger that Treasury bonds will fall sharply in price, drive up long-term interest rates and ultimately threaten the U.S. recovery.

This is an advance warning because long-term interest rates are still very low. Even if they rise from here, their impact on the economy may not be felt right away.

But if you hold medium- or long-term bonds, you need to get out NOW — before you suffer further damage.

10 year and 30 year charts

Using nearest futures contracts as the metric, the price of a 10-year Treasury note tumbled from a high of 130.09 on December 18, 2008, to a low of 114.98 on June 18, 2009.

It then spent most of the year’s second half trying to recover from that debacle.

But just in the last few days of December, while most traders were away or asleep, a renewed plunge in Treasury-note prices erased nearly all the gains since June … threatening new lows, paving the way for a new plunge in prices, and driving a new surge in 10-year yields.

The price decline in 30-year Treasury-bond prices has been even more dramatic: An historic 27-point plunge from 142.62 on December 19, 2008, to 115.67 on June 18, 2009 … followed by a feeble recovery … and now, as with Treasury notes, a new, ominous price decline and surge in yields.

The impact on consumers is unmistakable:

Even while Washington seeks to flood mortgage markets with easy money, 30-year fixed-rate mortgage rates are moving sharply higher. And even as the Fed does everything in its power to get Americans to spend, U.S. banks are tightening their credit standards and slapping on new fees.

The causes of the bond market troubles are equally obvious:

We have …

  1. The biggest and most permanent federal budget deficits in our country’s history — $1.4 trillion of red ink in fiscal 2009 and AT LEAST another $7 trillion in deficits over the next decade. The biggest government borrowing binge of all time. Just in the last week of the year, the Treasury Department borrowed $44 billion with the sale of 2-year notes, $42 billion with 5-year notes and $32 billion in 7-year notes, for a total of $118 billion — a new record. Expect more of the same throughout 2010.
  2. The most inflationary monetary policy of all time, including a sudden, record-smashing DOUBLING of the nation’s monetary base in 2009.

And most ominous of all …

A Government Gone Wild!

This is not a matter of personal opinion or political philosophy. Regardless of your particular persuasion, you cannot deny the folly of Washington’s escapades …

  • The U.S. Federal Reserve has tossed its traditional rulebook in the trashcan. It has opened its credit window to brokerage firms, guaranteed trillions of junk credit of the private sector and bought up over a trillion in junk mortgages.
  • The U.S. Treasury has bailed out the nation’s largest and most outrageous risk-takers — not only institutions like Fannie Mae, Freddie Mac, Citigroup, Bank of America, AIG, and GM … but, indirectly, also high-rollers like Goldman Sachs and JPMorgan Chase.
  • And now, adding madness to insanity, the U.S. government is opening the gauntlet to even more of the same:

    On Christmas Eve, the Treasury Department announced it will remove the limits on any and all aid to Fannie Mae and Freddie Mac for the next three years.

The intended consequence was to allay investor concerns that these two mortgage giants will exhaust the available government bailout funds.

Treasury officials know that an estimated 3.9 MILLION U.S. homes went into foreclosure last year … and, they know that they can expect more of the same in 2010. So they’re literally pulling all stops to funnel funds into this market.

But the unintended consequences are potentially greater concerns:

  • An even deeper hole in the federal budget,
  • An even larger avalanche of Treasury borrowings,
  • Still lower bond prices, and, inevitably,
  • Far higher long-term interest rates.

Most Financial Institutions Highly Exposed

If America’s financial institutions were prepared for higher interest rates, this might not be quite as serious. But as I demonstrated here two weeks ago, nothing could be further from the facts. (See "Three Government Reports Reveal New Looming Risk.")

Specifically …

  • The Federal Deposit Insurance Corporation (FDIC) reports that many more banks are now taking on higher levels of interest-rate risk, leaving them overly exposed to rate rises at precisely the wrong time. They’re stuffing their portfolios with long-term mortgages, which invariably fall in value when interest rates rise. And they’re relying too heavily on short-term financing, which will inevitably be more expensive when rates rise.
  • The U.S. Comptroller of the Currency (OCC) reports that America’s largest banks now hold $172.5 TRILLION in derivatives that are directly linked to interest rates, the most of all time. That’s over THIRTEEN times the amount they hold in credit derivatives — a primary cause of the 2008-2009 debt crisis.
  • And the Federal Reserve reports that banks aren’t the only ones vulnerable to higher interest rates. Also exposed are credit unions, life and health insurance companies, plus property and casualty insurers.

Bottom line: Don’t march into 2010 as if the word “risk” had been stricken from investment lexicon like four-letter words in a grammar school dictionary.

It hasn’t been; it’s still there. And it mandates continuing caution — to buy excellent values … with strong fundamentals … prudent risk management … and plenty of cash in reserve.

Good luck and God bless!

Martin

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 http://www.moneyandmarkets.com


© 2005-2022 http://www.MarketOracle.co.uk - 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