Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Tesla Robo Taxis are Coming THIS YEAR! - 16th June 24
Will NVDA Crash the Market? - 16th June 24
Inflation Is Dead! Or Is It? - 16th June 24
Investors Are Forever Blowing Bubbles - 16th June 24
Stock Market Investor Sentiment - 8th June 24
S&P 494 Stocks Then & Now - 8th June 24
As Stocks Bears Begin To Hibernate, It's Now Time To Worry About A Bear Market - 8th June 24
Gold, Silver and Crypto | How Charts Look Before US Dollar Meltdown - 8th June 24
Gold & Silver Get Slammed on Positive Economic Reports - 8th June 24
Gold Summer Doldrums - 8th June 24
S&P USD Correction - 7th June 24
Israel's Smoke and Mirrors Fake War on Gaza - 7th June 24
US Banking Crisis 2024 That No One Is Paying Attention To - 7th June 24
The Fed Leads and the Market Follows? It's a Big Fat MYTH - 7th June 24
How Much Gold Is There In the World? - 7th June 24
Is There a Financial Crisis Bubbling Under the Surface? - 7th June 24
Bitcoin Trend Forecast, Crypto's Exit Strategy - 31st May 24
Zimbabwe Officials Already Looking to Inflate New Gold-Backed Currency - 31st May 24
India Silver Imports Have Already Topped 2023 Total - 31st May 24
Gold Has Done Its Job – Isn’t That Enough? - 31st May 24
Gold Stocks Catching Up - 31st May 24
Time to take the RED Pill - 28th May 24
US Economy Slowing Slipping into Recession, But Not There Yet - 28th May 24
Gold vs. Silver – Very Important Medium-term Signal - 28th May 24
Is Gold Price Heading to $2,275 - 2,280? - 28th May 24
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

U.S. Interest Rates Surge as Fed, Congress Crush Debtholders

Interest-Rates / US Bonds Dec 10, 2010 - 08:35 AM GMT

By: Mike_Larson

Interest-Rates

Best Financial Markets Analysis ArticleWashington, 0. The bond market, 1.

That’s the score folks, in case you haven’t been keeping track. The Federal Reserve Chairman said his $600 billion “QE2″ program would lower interest rates. Instead, rates have done nothing but rise since investors got wind of the Treasury buying plan.


Then this week, Republicans in Congress — and the Obama administration — decided to kick Treasury holders while they’re down. They announced plans to cut estate taxes, lower payroll taxes, extend President Bush’s tax cuts for even the wealthiest citizens, and extend unemployment benefits for jobless Americans.

The catch? There’s no plan whatsoever to pay for any of it! The deal makes a total mockery of all that highfalutin language from the National Commission on Fiscal Responsibility and Reform.

Tallying Up the Losses

The bond market’s reaction has been swift and severe. Treasury bond prices plunged more than 2 points on Tuesday and another point-and-a-half the next day. That sent them to a six-month low.

The yield on the 10-year Treasury Note surged 21 basis points on Tuesday and another 15 on Wednesday. That brings its cumulative rise since October to 89 basis points!

What about shorter-term Treasuries? No solace there. The yield on the 5-year note has almost doubled — from 1.02 percent to 1.87 percent!

Many state and local governments face humongous budget holes. And their bonds have taken a nosedive.
Many state and local governments face humongous budget holes. And their bonds have taken a nosedive.

Municipals? If you bought these overvalued securities earlier this year when I said to avoid them, you’ve gotten hammered. Some muni bond funds have lost 7 percent, 8 percent, or 9 percent of their value in just a couple months.

Or what about STRIPS — bond market investments that are among the most sensitive to changes in interest rates? Hold on to your hats! The Vanguard Extended Duration Treasury ETF (EDV), which tracks the value of these investments, has plunged more than 21 percent since late August.

Budget Deficit Exploding as Fiscal Sanity Sorely Lacking

I’ve already discussed how the Fed’s plan to support bond prices has been a dismal failure. So there’s no need to bang that drum too loudly right now. The new selling catalyst this week was the budget-busting bundle of tax and benefit goodies The New York Times dubbed a “back-door stimulus plan.”

Politicians on both sides of the aisle have paid a lot of lip service to cutting deficits. They’ve talked of the need for fiscal restraint. Some have pointed to the European debt crisis as a preview of what could happen here if we don’t get our house in order.

But what they’re SAYING and what they’re DOING are too completely different things. The latest package being discussed in Washington will likely cost more than $900 billion over the next two years. That’s on par with the cost of the previous “official” stimulus plan.

We don’t have the money, of course; so the budget deficit is going to explode once again. Credit Suisse now estimates the deficit will come in at a whopping $1.34 trillion in fiscal 2011. That’s after a $1.29 trillion deficit in 2010 and $1.42 trillion in red ink in 2009.

As the chart to the right clearly shows, Washington spending is out of control!

We were able to get away with this for a while. But now bond investors are demanding their pound of flesh. The cost of borrowing is climbing here in the U.S., just as it already surged in heavily indebted European nations.

My strategy? Continue to avoid long-term Treasuries during the “plunge” phase of this move. Or consider buying investments that rise in value as bonds fall.

Then once rates rise to reasonable levels, look to tentatively, selectively add exposure to fixed-income investments. That way you’ll lock in much juicier yields for the future.

Until next time,

Mike

P.S. This week on Money and Markets TV, we checked in on the health of the U.S. economy, and offered our prognosis for the pace of recovery in 2011. And I gave viewers my opinion on whether economic growth will speed up next year, plus a perspective on last week’s disappointing employment report.

If you missed last night’s episode of Money and Markets TV — or would like to see it again at your convenience — it’s now available at www.weissmoneynetwork.com.

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.


Comments

Rick
10 Dec 10, 19:31
T-Notes & T-Bonds: Let The Buyer Beware

"My strategy? Continue to avoid long-term Treasuries during the “plunge” phase of this move. Or consider buying investments that rise in value as bonds fall.

Then once rates rise to reasonable levels, look to tentatively, selectively add exposure to fixed-income investments. That way you’ll lock in much juicier yields for the future."

That's fine Mike except for one thing. Virtually all marketable U.S. Treasury securities are 'callable' which means that the U.S. Treasury Secretary at his pleasure can order an early redemption of select T-Notes & T-Bonds.


Post Comment

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