Best of the Week
Most Popular
1.Bitcoin War Begins – Bitcoin Cash Rises 50% While Bitcoin Drops $1,000 In 24 Hours - Jeff_Berwick
2.Fragile Stock Market Bull in a China Shop -James_Quinn
3.Sheffield Leafy Suburbs Tree Felling's Triggering House Prices CRASH! - Nadeem_Walayat
4.Bank of England Hikes UK Interest Rates 100%, Reversing BREXIT PANIC Cut! - Nadeem_Walayat
5.Government Finances and Gold - Cautionary Tale told in Four Charts - Michael_J_Kosares
6.Gold Stocks Winter Rally - Zeal_LLC
7.The Stock Market- From Here to Infinity? - Plunger
8.Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - MarketsToday
9.Electronic Gold: The Deep State’s Corrupt Threat to Human Prosperity and Freedom - Stewart_Dougherty
10.Finally, The Fall Of The House Of Saud - Jim_Willie_CB
Last 7 days
Stock Market Lemmings Are Heading Towards The Cliff… Again - 24th Nov 17
The Precious Metals Bears' Fear of Fridays - 23rd Nov 17
UK Economic Austerity, Bloodletting and Incompetence - 23rd Nov 17
Stocks Are At The End Of The Line – Prepare Yourself Now! - 23rd Nov 17
Some Traders Hit. Some Traders Miss. Here's How to be Part of the 1st Group - 22nd Nov 17
Geopolitical Risk Highest “In Four Decades” – Global Gold Demand to Remain Robust - 22nd Nov 17
Relationship between Crude Oil Price and Oil Stocks - 22nd Nov 17
Harry Dent’s Gold Prediction Invalidated - 22nd Nov 17
Gold Sector is On a Long-term Buy Signal - 21st Nov 17
Saudi Arabia and Israeli Alliance Targets Iran - 21st Nov 17
What History Says for Gold Stocks in 2018-2019 - 21st Nov 17
US Bond Market Operation Twist by Another Name and Method? - 21st Nov 17
Learning from Money Supply of the 1980s: The Power and Irony of “MDuh” - 20th Nov 17
Trump’s Asia Strategy, Goals and Realities - 20th Nov 17
Crude Oil – General Market Link - 20th Nov 17
Bitcoin Price Blasts Through $8,000… In Zimbabwe Tops $13,500 As Mugabe Regime Crumbles - 20th Nov 17
Stock Market More Correction Ahead? - 19th Nov 17
Universal Credits Christmas Scrooge Nightmare for Weekly Pay Recipients - 18th Nov 17
Perspective on the Gold/Oil Ratio, Macro Fundamentals and a Gold Sector Bottom - 18th Nov 17
Facebook Traders: Tech Giant + Technical Analysis = Thumbs Up - 18th Nov 17
Games Betting System For NCAA Basketball Sports Betting - Know Your Betting Limits - 18th Nov 17
Universal Credit Doomsday for Tax Credits Cash ISA Savers, Here's What to Do - 18th Nov 17
Gold Mining Stocks Fundamentals Q3 2017 - 17th Nov 17
The Social Security Inflation Lag Calendar - Partial Indexing - 17th Nov 17
Mystery of Inflation and Gold - 17th Nov 17
Stock Market Ready To Pull The Rug Out From Under You! - 17th Nov 17
Crude Oil – Gold Link in November 2017 - 17th Nov 17
Play Free Online Games and Save Money Free Virtual Online Games - 17th Nov 17
Stock Market Crash Omens & Predictions: Another Day Another Lie - 16th Nov 17
Deepening Crisis In Hyper-inflationary Venezuela and Zimbabwe - 16th Nov 17
Announcing Free Trader's Workshop: Battle-Tested Tools to Boost Your Trading Confidence - 16th Nov 17
Instructions to Stop a Dispossession Home Sale and How to Purchase Astutely at Abandonment Home - 16th Nov 17
Trump’s Asia Tour: From Old Conflicts to New Prospects - 16th Nov 17
Bonds And Stocks Will Crash Together In The Next Crisis (Meanwhile, Bond Yields Are Going Up) - 16th Nov 17
A Generational Reset That Will Redistribute Wealth to the Bottom 60% Is Near - 16th Nov 17
Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - 16th Nov 17
Gold’s Long-term Analogies - 16th Nov 17

Market Oracle FREE Newsletter

Traders Workshop

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.


© 2005-2017 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

Catching a Falling Financial Knife