Best of the Week
Most Popular
1. Best Cash ISA Savings Account for Soaring UK Inflation - February 2018 - Nadeem_Walayat
2.Gold Price Forecast 2018 - February Update - Nadeem_Walayat
3.Bitcoin Crypto Currencies Crash 2018, Are We Near the Bottom? - Nadeem_Walayat
4.Trump Bubble Bursts, Stock Market Panic Dow 1175 Point Crash Analysis - Nadeem_Walayat
5.Gold Corrects, Bitcoin Markets Crash, Whilst Stocks Plunge - Nadeem_Walayat
6.US Treasury Bonds: Fuse to Light the Bonfire - Jim_Willie_CB
7.Dow Falls 666 Points As Cryptocurrencies Crash And Krugman Emerges From His Van - Jeff_Berwick
8.Stock Market Roller Coaster Crash Ride Down to Dow Forecast 23,000 - Nadeem_Walayat
9.Trading the Shadows - Oil, Dollar, Stocks, Gold Trend Analysis - B.R. Hollister
10.Stock Market Analysis: Baying for Blood - Abalgorithm
Last 7 days
Goofy Indictments Divert Attention from Criminal Abuses at the FBI and DOJ - 21st Feb 18
Bitcoin or British Pound ‘Pretty Much Failed’ As Currency? - 21st Feb 18
Stock Market Waiting for the Fed - 21st Feb 18
National Identity Demands Restrictive Immigration - 21st Feb 18
Best Opportunities for Freelance Technical Writing Jobs - 21st Feb 18
4% US 10-year Treasury Note Yield Will Be a Floor Not a Ceiling - 20th Feb 18
Governments Are LYING about Their Gold Activities while Mining Companies Cower - 20th Feb 18
No Silver Lining Here - 20th Feb 18
Semi Conductor Stocks SEMI Bearish? - 20th Feb 18
The Prisoner Promised Land - 20th Feb 18
Best Car Dash Cam Review: Z-Edge S3 Dual Dash Cam - UNBOXING (1) - 20th Feb 18
How Inflation Reduces The Real Value Of Social Security Net Of Medicare Premiums - 19th Feb 18
Could Stellar Lumens be a Challenger to Bitcoin for International Payments? - 19th Feb 18
US-China Trade War Escalates As Further Measures Are Taken - 19th Feb 18
How To Trade Gold Stocks with Momentum - 19th Feb 18
Is a New Gold Bull Market on the Horizon? - 19th Feb 18
Stock Market Decision Point! - 19th Feb 18
An Inflation Indicator to Watch, Part 1 - 18th Feb 18
Get on Top Of Debt Before It Gets on Top of You - 18th Feb 18
Will the Stock Market Make a Double Bottom? - 18th Feb 18
5 Reasons Why Commodities Are the Investment Place to be in 2018 - 18th Feb 18
1 Week Later, Stock, Bond Market Risk Remains ‘On’ as 2 of 3 Amigos Ride On - 17th Feb 18
Crude Oil Prices: A Case of Dueling Narratives? - 17th Feb 18
Free 1000 Youtube Subscribers Services - YTpals, Subpals, SubmeNow Test - 17th Feb 18
How to Trade as We Near March Stock Market Top - 16th Feb 18
Bitcoin as Poison - 16th Feb 18
GDX Gold ETF Weathers Stock Market Selloff - 16th Feb 18
Casino Statistics and Demographics - 16th Feb 18
IS Today Thee Stock Market Turn Day? - 16th Feb 18
Huge SMIGGLE Shopping HAUL, Pencil Cases, Drinks Bottles, Back Packs, Toys.... - 16th Feb 18
Tesla Cash Keeps Burning at $320 a Share - 15th Feb 18
Big Conflict Ahead in the Financial Markets - 15th Feb 18
Stocks Extend Rally Off Friday's Low, But Short-Term Exhaustion Near - 15th Feb 18
Stock Market Out on a Limb... - 15th Feb 18
Things Only a True Friend Would Say About Gold - 14th Feb 18
Global Debt Crisis II Cometh - 14th Feb 18
Understanding Crude Oil Behavior - 14th Feb 18
Stock Market is Getting Scary... - 14th Feb 18

Market Oracle FREE Newsletter

Urgent Stock Market Message

How the Fed Will Crash the U.S. Bond Market

Interest-Rates / US Bonds Feb 25, 2013 - 07:00 AM GMT

By: Submissions

Interest-Rates

Richard Moyer writes: When you or I buy bonds, we pay a certain amount of money to buy someone elses debt. In return, they pay us a certain amount of interest for a fixed period of time.


The Federal Reserve can influence prices of debt by offering a certain risk-free interest rate. In this article, this risk-free rate is pictured as the Fed-O-Matic, a money-printing machine sitting on the desk of Lord Bankingstone, respresenting big finance. You put money in, it dumps more money into the bucket according to the rate of interest.

While the Fed-O-Matic pays good rates of interest, Mr. Rumplypump’s bonds aren’t worth so much. At the same time, anyone wishing to issue bonds is going to have to beat the Fed-O-Matic rate pretty handsomely, seeing as how the machine has absolutely zero risk.

When the Fed-O-Matic pays crappy rates of interest, Mr. Rumplypump can command high prices for his high-paying bonds. At the same time, anyone issuing bonds doesn’t have to pay very much interest to beat the Fed-O-Matic.

People saving for retirement, especially using 401(k)s, are routinely told to buy stocks early in their careers, and then as retirement gets closer, transition to safe, low-yielding bonds to guarantee income and avoid the possibility of a stock market crash. Assuming stable interest rates, this is a good strategy. However, wildly fluctuating interest rates resulting from an activist central bank can play havoc on the bond market.

Mr. Roflpants gets burned when he buys bonds during a zero-interest-rate policy (ZIRP), and then has to sell his bonds during a period of more typical interest rates. If prevailing interest rates double, the same bond is worth half as much. The recent news that the Fed is reconsidering its money-printing extravaganza bodes ill for the bond markets for several reasons.

Clearly, the value of existing bonds will crash. As the bond market crashes, the stock market won’t look as attractive. The low prices on existing debt and good rates of return on new debt will move money out of stocks and into bonds.

Imagine what will happen when Treasury bond rates are 6% instead of 1%. The United States would be forced to pay roughly a trillion dollars a year in interest on its $17 trillion debt. This would increase the deficit by roughly a trillion dollars, likely reducing trust in US debt. The US government, looking for buyers of yet more debt, without the Fed as its biggest customer, will be forced to raise interest rates further. Higher rates lead to bigger deficit. Bigger deficit leads to higher rates.

Higher interest rates will also cause mortgage rates to increase, meaning the mortgage payment for a given size of home loan will increase. Seeing as how the mortgage payment size is what decides whether someone can buy a house, home prices will necessarily have to come down, other things being equal.

At first, the end of the Fed’s money printing experiment will be read by investors as a sign of recovery, and commodity assets like gold and silver will probably suffer. Then, as interest rates rise and the Treasury bond market bubble deflates, those stores of value won’t look so bad and will likely rebound. Should things unfold in this way, there will be a good buying opportunity for gold and silver between the announcement that QE3 is ending and the inevitable increase of interest rates that will follow.

Richard Moyer

http://shadesofthomaspaine.wordpress.com

© 2013 Copyright Patrick Henningsen - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 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

6 Critical Money Making Rules