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
Global Warming ClImate Change Mega Death Trend - 8th Apr 24
Gold Is Rallying Again, But Silver Could Get REALLY Interesting - 8th Apr 24
Media Elite Belittle Inflation Struggles of Ordinary Americans - 8th Apr 24
Profit from the Roaring AI 2020's Tech Stocks Economic Boom - 8th Apr 24
Stock Market Election Year Five Nights at Freddy's - 7th Apr 24
It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- 7th Apr 24
AI Revolution and NVDA: Why Tough Going May Be Ahead - 7th Apr 24
Hidden cost of US homeownership just saw its biggest spike in 5 years - 7th Apr 24
What Happens To Gold Price If The Fed Doesn’t Cut Rates? - 7th Apr 24
The Fed is becoming increasingly divided on interest rates - 7th Apr 24
The Evils of Paper Money Have no End - 7th Apr 24
Stock Market Presidential Election Cycle Seasonal Trend Analysis - 3rd Apr 24
Stock Market Presidential Election Cycle Seasonal Trend - 2nd Apr 24
Dow Stock Market Annual Percent Change Analysis 2024 - 2nd Apr 24
Bitcoin S&P Pattern - 31st Mar 24
S&P Stock Market Correlating Seasonal Swings - 31st Mar 24
S&P SEASONAL ANALYSIS - 31st Mar 24
Here's a Dirty Little Secret: Federal Reserve Monetary Policy Is Still Loose - 31st Mar 24
Tandem Chairman Paul Pester on Fintech, AI, and the Future of Banking in the UK - 31st Mar 24
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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

Interest-Rates

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,

Mike

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 .

Money and Markets 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