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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

U.S. Treasury Bonds Set to Crash, Heres How to Make a Killing

Interest-Rates / US Bonds Nov 09, 2008 - 07:29 AM GMT

By: Money_and_Markets


Best Financial Markets Analysis ArticleA new president … new ideas … and an old problem: How to pay for it all!

Mike Larson writes: It's been one heck of a week in American politics. We have a new president-elect in Barack Obama … a new approach to governing this country … and lots of new ideas about how to get the economy off its back.

For instance, Obama has proposed investing billions of dollars on infrastructure —

• New bridges,

• Improved roads, and

• Better schools.

But that could get darn expensive … really fast.

In fact, the American Society of Civil Engineers estimates the U.S. would need to spend $1.6 TRILLION over five years to get the nation's infrastructure into ideal shape.

President-elect Obama will need more than Superman's powers to put the economy back together again.
President-elect Obama will need more than Superman's powers to put the economy back together again.

Obama is also considering a second economic stimulus package. The number being bandied about is $175 billion — including tax checks for Americans and a tax credit aimed at creating jobs.

Another proposal calls for spending $150 billion over 10 years to develop cleaner sources of energy, while still another is aimed at reforming the U.S. health care. The potential cost? As much as $65 billion a year.

Many of these new ideas have merit.

There's just one old problem: How the heck are we going to pay for it all?

Uncle Sam Is Tapped Out …

What's the prudent way to manage your money?

Many of Obama's ideas are good in concept. But where will he get the money?
Many of Obama's ideas are good in concept. But where will he get the money?

Sock away funds during the good times so you have a cash “kitty” you can tap into when times get tough.

The same goes for governments.

Ideally, they run budget surpluses during the good times. Then when growth tanks, they can spend more — even run budget deficits for a while — to help rev up the economy again.

Unfortunately, we've been operating in the red for years on end — good economy OR bad. The last budget surplus was $127 billion in 2001. Since then, we have racked up a cumulative 2.1 TRILLION in budget deficits. That includes a record $455 billion in fiscal 2008 alone.

Moreover, there is no sign of ANY let up on the horizon.

Even BEFORE Obama was elected, and even BEFORE the total costs of the latest $700 billion banking bailout were taken into account, the administration was predicting a $482 billion deficit for fiscal 2009.

Now, with the costs of the Troubled Asset Relief Program (TARP) included, private analysts are estimating a budget deficit of as much as $1 TRILLION. And that number could ultimately prove too low depending on how many new programs make their way from the drawing board to the new President's desk.

The result:

Our Borrowing Needs Are Shooting Through The Roof!

The Treasury just announced that it will have to borrow an estimated $550 billion in the October-December quarter. That's almost FOUR TIMES what officials were projecting just a few months ago and MORE THAN DOUBLE what we borrowed in the first quarter of this year.

The Treasury will sell $25 billion in 3-year notes on November 10, the first time the government has sold debt with that maturity since May 2007. The sale will be followed by a $20 billion auction of 10-year notes a couple days later, and $10 billion in 30-year bonds the day after that.

But that's just a start!

Goldman Sachs estimates that the government will soon have to borrow TWO TRILLION DOLLARS — to finance the $850 billion federal deficit … to buy $500 billion in bad assets … and roll over $561 billion in maturing Treasuries securities … plus more.

And we believe that as the U.S. economy sinks, and tax revenues fall, even that shocking estimate could prove to be too low.

Supply, Supply, Supply

You don't need a Ph.D. in economics to understand the law of supply and demand. If supply rises enough to overwhelm demand, prices fall. That's true for cars, houses AND … U.S. Treasury bonds.

We have already seen long bond futures drop in price — from a high of 124 23/32 in mid-September to a recent low of 112 17/32. That's a decline of just over 12 points. Ten-year Treasury yields have jumped from a low of 3.39% to a recent high of 4.08%.

In the months ahead, we'll likely see more of the same. That's true no matter what the Federal Reserve does with the federal funds rate .

Remember: The Fed can only control very short-term rates directly — and even that process isn't always perfect, as we recently saw with LIBOR.

An Important Point to Remember …

Long-term rates move up and down based on investor perceptions of bond supply, inflation, and credit risk. They are driven by the “buy” and “sell” decisions of millions of investors. And those “sell” tickets have been piling up on Wall Street and in the interest rate pits in Chicago.

So if you're shopping for a fixed-rate mortgage, lock in your rate now. And if you're invested in sectors vulnerable to rising long-term rates (housing, REITs, etc.), sell.

Or if you're more aggressive, consider hedging or profiting from rising long-term interest rates. There are mutual funds and ETFs that allow you to do so. You can find more details on our favorite investment vehicles in my ETF trading service .

Until next time,


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 .

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