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Posted by on Apr 16, 2011 in Interest Rates/Loan Limits, Market Conditions | 9 comments | Print Print

Rates Up or Down?

From the

The Treasury market may be about to prove the haters wrong.

You can’t swing a dead cat these days without hitting someone warning about an imminent rise in rates on longer-term Treasury bonds—especially as the end looms for the Federal Reserve’s $600 billion bond-buying program. There are plenty of reasons cited for this expected aversion to U.S. government debt. Fiscal irresponsibility is one. Higher inflation is another.

Indeed, the Labor Department’s consumer-price index, which is being released on Friday, is expected to be up 2.6% in March from a year earlier. That is largely because of higher food and energy prices, though core inflation excluding those items is also expected to drift higher.

That would follow a string of reports this week that separately have shown producer prices and import prices are also on the rise.

Largely because of such concerns, some well-known bond investors like Bill Gross and Dan Fuss have cautioned that rates will rise once the Fed stops buying Treasury debt at the end of June.

After all, the Fed has purchased the equivalent of more than two-thirds of Treasury issuance since last fall. The worry is that when the central bank stops buying, no one else will step up, forcing rates higher.

Yet that reasoning seems flawed, given the unsteady nature of this recovery and the reaction in the markets when the Fed stopped buying bonds last year. If anything, rates have been rising when the Fed is buying, and falling when it isn’t—serving as both a gauge of growth prospects and a sign of how reliant markets and the U.S. economy have become on the Fed’s so-called quantitative-easing programs.

For example, the 10-year Treasury yield dropped from roughly 4% last April to 2.5% in August amid a growth scare following the end of the Fed’s first round of bond buying.

It is difficult to see why this time should be so different, although the labor market is in better shape than a year ago. The surprising weakness of first-quarter economic growth is a stark reminder of the recovery’s vulnerability.

When the Fed does exit from the market, investors just might pile back in. If history is a guide, Treasurys could yet surprise the bond gurus with their strength.


  1. One notes the irony of an article saying investors will be eager to buy U.S. debt obligations sharing the front page with a story that the U.S. needs to raise its debt ceiling or could face default.

    Remember friends, owing money to people is the same thing as being rich!

  2. Bill Gross made the same call at the end of QE1. He said to sell the day yields started dropping from 4 to 2.5. Durrrr.. Good one, Guru!

  3. The bond market isn’t a funding tool. It’s how the fed controls monetary policy. It’s as simple as that.

  4. The end of QE2 is the big question mark of the year. Actually, if interest rates do start going up, it will help the dollar, and limit the increases in inflation caused by the cheap dollar. I don’t think higher rates will kill the RE market, because so many houses are being purchased with cash, and current low rates haven’t exactly set the housing market on fire. If people really want a house, they will buy it – I remember when rates were over 10%, and people still bought, to “lock in low rates.”

    The larger question is the long term economy. I still believe we are going through at least a 10 year adjustment to the reality of the hollowing out of the economy which likely started in the 1970’s. Basically US households made up for lost income (and lost manufacturing jobs) with credit. Now that the credit is gone, we all have to face the fact that we can’t live like millionaires on 50K a year.

  5. I just read an interesting article in Vanity Fair. Here’s a statistic to chew on. In the 1980’s the top 1% US ‘earners’ controlled 25% of the US national wealth. That figure is now 40% of the US national wealth. “Their fate is bound up with how the other 99% live.”

  6. Dream on. Rates WILL go up unless the Fed keeps manipulating them lower (see zero-hedge for the latest possible manipulation tactic). We just don’t know when the Fed will stop the manipulation.

  7. So the Fed is now AIG? But now we’ll have inflation because they are buying Treasuries from themselves with printed money?

  8. I guess the wall street journal wasn’t planing on the S&P changing it’s outlook for US credit to negative today. Our country has a debt problem but we refuse to address it because 90% of wealth is someone’s debt (fractional reserve lending). If debt problem gets addressed and we restructure than somebody’s wealth takes a hit.

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