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
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

10-Year U.S. Treasury Note Trades Near 6%; If Taper Is For Real

Interest-Rates / US Bonds Dec 10, 2013 - 05:48 PM GMT

By: Michael_Pento

Interest-Rates

The most important question for investors at this time is to determine how high interest rates will rise; if indeed the Fed's artificial suppression of yields is truly about to end. To accomplish this we first must consider where yields last were outside of central bank debt monetization, a recession and the Eurozone debt crisis. Then, we need to factor in the increased risks to inflation and solvency, in order to arrive at an appropriate estimation for the level of interest rates during 2014.


The last time there was; no QE is session, no flight to safety in U.S. Treasuries from European debt insolvency, and the economy was not contracting, was in the spring of 2010. During that time, the U.S. Ten Year Note offered a yield just below 4 percent. But it is not accurate to then assume that rates will just gradually rise back to where they were before all three conditions were in place. Here's why.

Credit Risks Have Increased

It is crucial to understand why the Fed's inflationary campaign will not succeed in bailing out the economy. The reason for this is while it is true that inflation makes easier for an over-indebted economy to pay down debt, it also (because of ultra-low low borrowing costs) tends to truncate the deleveraging process. And, if those low interest rates stay in place for a protracted period of time it causes the economy to become even more leveraged than it was prior to the crisis. This is precisely what we find today.

The proof for this can be found in the borrowing habits of corporations, consumers and the government after the credit crisis unfolded. It is true that immediately after the collapse of the real estate market, consumers and businesses began to pay down debt. However, the government immediately began piling on new debt in record fashion. Corporations then started to accumulate more debt in the spring of 2010. And consumers have now fully reversed course as well and are happily adding to their debt loads.

Thanks to the nearly-free money offered by the Fed during the past several years, publicly traded U.S. Treasury debt has soared by $4 trillion (46%) since the spring of 2010. Corporate debt has increased by $1.6 trillion (8.2%) during that same timeframe. And, in the third quarter of 2013 consumer debt jumped by $127 billion, to reach a total of $11.28 trillion -- the largest quarterly increase since Q1 2008. Household debt was up across the board with mortgage debt, auto loans, student loans and credit card balances all increasing substantially.

The significant increase in aggregate debt outstanding in the economy equates to a substantial increase in the credit risk of owning U.S. sovereign debt.

Inflation Risks Rising

The last time the 10-Year Note was trading at 4%, interest rates had been near zero percent for just over one year. Now, money has been nearly free for a total of five years. In addition, the size of the Fed's balance sheet has soared from $2.3 trillion, to just under $4 trillion (an increase of over 70%). The inflation risks in the economy have vastly increased given the facts that the supply of bank credit (high-powered money) is at an all-time record high, and at the same time the level of borrowing costs are at a record low.

So How High Will Rates Go?

The bottom line is the interest rates offered on sovereign debt are mostly a function of the credit and inflation risks associated with owning that debt--not the level of growth in the economy, no matter what Wall Street likes to claim. Given the above data, it is clear that the 4% yield on the Ten-Year Note seen back in early 2010 will be eclipsed. Since inflation pressures and the solvency risks to the nation have increased by an average of about 50%, it would seem logical to assume the Ten-Year Note should trade 50% higher than where it was back in early 2010. This would put the Ten-Year in the 6% range, which is still about 100 basis points below the forty-year average. Of course, this is providing the Fed is actually going to end its artificial manipulation of long-term interest rates next year.

Don't be Fooled by the Consensus

The overwhelming consensus on Wall Street is that the economy will slowly improve and the Fed's taper will cause that benchmark interest rate to rise gradually back towards 3.25% over the course of 2014, from its 2.83% level today. However, the real risk is that rates do not rise slowly and by a small increment. Don't forget, the Fed is has been buying 80% of all new Treasury debt, and it is a buyer that is totally indifferent to price.

A genuine attempt by the Fed to exit QE will cause interest rates to quickly soar back above 4%, and then perhaps as high as 6% in just a few months after the taper is concluded.

Therefore, it is prudent to assume the new Fed Chairman, Janet Yellen, will abort the tapering process shortly after it begins. That's because rapidly-rising interest rates would be devastating to real estate, equities and the overleveraged economy in general. The shock for Wall Street will be that the Fed reverses tapering its asset purchases and begins adding to the total amount of QE next year. This would mark a significant turning point for the dollar, international equities and commodities.

Michael Pento is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

Respectfully,

Michael Pento
President
Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.
               
Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 
       
Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.
       

© 2013 Copyright Michael Pento - 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.

Michael Pento Archive

© 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