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If Bernanke Does Not Taper Soon, The Bond Market Will Force Him

inthemoney

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Since yesterdays highly anticipated FOMC meeting the major stock indexes are soaring. As you all know, the Federal Reserve said that they will continue their current $85 billion a month QE-3 program. The current QE-3 program is where the central bank buys $45 billion in mortgage backed securities (MBS) and another $40 billion in U.S. Treasuries every month. The Federal Reserve also has the fed funds rate at zero to a quarter percent, it has been at that level since December 2008.

So what will cause the Federal Reserve to taper the current QE-3 program? Obviously, the central bank tells us that there is very little inflation in the economy so there is really no danger to having the QE-3 program in place. History has told us that prolonged stimulus has resulted in high inflation or some type of bubble. In 2001, the former Federal Reserve chairman Alan Greenspan lowered the fed funds rate to 1.0 percent and that lead the stock market to new all time highs. Unfortunately, it also lead to the largest housing and credit bubble in seventy years. Could there be another bubble being created at this time, or is this time different? After all, almost every central bank is following the lead of the Federal Reserve when it comes to easy money policies. The Bank of England, Bank of Japan, and many other central banks are all creating money out of thin air so perhaps this time it is different.

Recently, yields on the 10-year U.S. Treasury Note have climbed sharply higher. Today, the yield on the 10-year U.S. Treasury Note is around 2.67 percent. While this is still a very low yield it should be noted that it has spiked higher by more than 1.25 percent since bottoming in July 2012. The yield chart of the 10-year U.S. Treasury note is signaling a move to 3.0 percent in the near term, so it would be prudent to expect bond prices to continue to fall. Yields are moving higher despite the Federal Reserve buying $40 billion a month in U.S. Treasuries. Is the bond market trying to tell us something? There is an old saying on Wall Street that the bond market is smarter than the stock market. You see, the people that run the bond market have much more capital than the people that buy stocks. Remember the old saying, follow the money.

If the bond market is moving higher it is telling us that the Federal Reserve is going to need to taper their current QE-3 program very soon. If they do not taper soon then they are risking another bubble or perhaps massive inflation. The Federal Reserve's balance sheet is now around the $4 trillion level, so perhaps that is the next bubble to burst. Either way, everyone should keep an eye on the bond market as it always tells us what is really happening before it does.

Nicholas Santiago


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I think they will taper it off and then tell the markets retroactively after they have done what they have done.
 
Bond prices move inversely with yield.

Yield is at all time lows. The economy will recover, raising yields.

Bond prices will fall.

This ain't rocket science.
 
Inflation is still limited by the depressed levels of demand, that is still limited by high unemployment. Until unemployment drops below 5%, we will not see price rises on most goods since wage pressure is not going to push them until unemployment drops.
 
Bond prices move inversely with yield.


Yield is at all time lows. The economy will recover, raising yields.

Bond prices will fall.

This ain't rocket science.

LOL !!

Maybe you should start thinking that the situation is a bit more complicated than it actually is.

And maybe you wouldn't post such drek.

" The economy will recover soon.." Says who ?

A ignorant Obama supporter who has no idea what kind of damage Bernake is doing to our long term economy ? Or Obama is doing to our economy ?

Under this idiot, we will continue to strugle and there is so much stagnant money sitting at the top that ANY REAL growth will quickly be met with higher interest rates as the Fed tries to pull all that extra money back in.

You people did this, just so you know.

Banks are holding record reserves, with off balance sheet debt climbing as our population grows and ages.

Cities, liberal cities are declaring bankruptcy and states, liberal states aren't far behind.

But some blind partisan on a forum says the economy will improve .....

Absolutley unreal.
 
Inflation is still limited by the depressed levels of demand, that is still limited by high unemployment. Until unemployment drops below 5%, we will not see price rises on most goods since wage pressure is not going to push them until unemployment drops.

If you think inflation is largely explained by the Phillips Curve, then what do you think is the risk or downside of this unprecedented bond-buying scheme? Triggering another bubble for example, like the OP indicates?
 
I think they will keep it going till the mid terms elections....ofailure can't afford to lose any more seats in the senate or house.


I think they will taper it off and then tell the markets retroactively after they have done what they have done.
 
I think they will keep it going till the mid terms elections....ofailure can't afford to lose any more seats in the senate or house.

I doubt it. We should have a new fed chairman early next year. That would be the latest I would put it, but who knows.
 
I doubt it. We should have a new fed chairman early next year. That would be the latest I would put it, but who knows.

The next Chairman will be MORE dovish than Bernanke. my sense is that they will taper because the amount of bond buying now exceeds the amount of government issuance.
 
They will continue until Obama is out of office.

The Fed is buying MASSIVE amounts of short term Securities, with the likely result being a spike in bond yields and a spike in our debt service paymemt as those bonds mature

With NO private sector growth to speak of the spike in yields will kill off any legitimate growth as interest rates rise.

With that the US's off the books unfunded liabillities are growing exponentially as our population ages and millions get new subsidies from Obama Care.

Harry Ried admitted Obama care was a path to single payer, but with our debt swelling out of control and our private sector spinning its wheels there will be no way to fund it.

Stupid Progressives will go after " the rich". If they get their tax hikes the Feds will run through that money instantly.

Obama is a disaster to this country and every stupid Liberal is Complicit in whats coming next.
 
LOL !!

Maybe you should start thinking that the situation is a bit more complicated than it actually is.

And maybe you wouldn't post such drek.

Fine. Go with 'the economy continues to stagnate (although its been growing slowly and by all accounts should continue on this path).

Interest rates stay low because no one is borrowing, inflation remains fairly low because the economy is y heating up. Bond market remains high.

I have a feeling you are trying to pretend that QE will raise inflation horribly in the near term, and that's basically been proven false by...reality.


Like I said, its not rocket science.
 
They will continue until Obama is out of office.

The Fed is buying MASSIVE amounts of short term Securities, with the likely result being a spike in bond yields and a spike in our debt service paymemt as those bonds mature

With NO private sector growth to speak of the spike in yields will kill off any legitimate growth as interest rates rise.

There isn't going to be a spike in yields just like there wasn't a spike in inflation when QE was first implemented.

With that the US's off the books unfunded liabillities are growing exponentially as our population ages and millions get new subsidies from Obama Care.

Harry Ried admitted Obama care was a path to single payer, but with our debt swelling out of control and our private sector spinning its wheels there will be no way to fund it.

The same way government funds its spending now, by selling bonds...
 
So what will cause the Federal Reserve to taper the current QE-3 program? Obviously, the central bank tells us that there is very little inflation in the economy so there is really no danger to having the QE-3 program in place. History has told us that prolonged stimulus has resulted in high inflation or some type of bubble. In 2001, the former Federal Reserve chairman Alan Greenspan lowered the fed funds rate to 1.0 percent and that lead the stock market to new all time highs. Unfortunately, it also lead to the largest housing and credit bubble in seventy years. Could there be another bubble being created at this time, or is this time different? After all, almost every central bank is following the lead of the Federal Reserve when it comes to easy money policies. The Bank of England, Bank of Japan, and many other central banks are all creating money out of thin air so perhaps this time it is different.

On March 24, 2000 the S&P 500 closed at its all time high (at the time) of 1527. Secondly, the Bank of Japan had adopted the first credit easing policy, i.e. asset purchases in excess of what is necessary to keep overnight reserve markets close to zero. But this was entirely warranted given the general deflation that had plagued the country for more than a decade. We must examine the nature of long term rates and non-conventional lending practices to gain any insight into the housing bubble.

Recently, yields on the 10-year U.S. Treasury Note have climbed sharply higher. Today, the yield on the 10-year U.S. Treasury Note is around 2.67 percent. While this is still a very low yield it should be noted that it has spiked higher by more than 1.25 percent since bottoming in July 2012. The yield chart of the 10-year U.S. Treasury note is signaling a move to 3.0 percent in the near term, so it would be prudent to expect bond prices to continue to fall. Yields are moving higher despite the Federal Reserve buying $40 billion a month in U.S. Treasuries. Is the bond market trying to tell us something? There is an old saying on Wall Street that the bond market is smarter than the stock market. You see, the people that run the bond market have much more capital than the people that buy stocks. Remember the old saying, follow the money. [/COLOR]

Truth be told, i believe the Fed is actually orchestrating higher long term rates as a means of transitioning into the the taper. Which makes sense, as it will remove a great deal of potential volatility. Only consistent economic growth will pave the way for a reduction in both monetary and fiscal stimulus. By November, the Fed will have purchases that exceed the January - December fiscal deficit. Barring a massive downturn in federal revenue, this will be the first time such a scenario has occurred since Q3 2008.

If the bond market is moving higher it is telling us that the Federal Reserve is going to need to taper their current QE-3 program very soon.

True, but but you are not explaining why. An interest rate increase possesses an economic growth prerequisite in a high unemployment/zero interest rate environment. Growth, not interest rates, will dictate future Fed policy. They are surely not above putting a long term ceiling on rates.

If they do not taper soon then they are risking another bubble or perhaps massive inflation.

Both 5 and 10 year breakeven rates remain anchored below 2%.
 
" The economy will recover soon.." Says who ?

What causes yields to increase?

A ignorant Obama supporter who has no idea what kind of damage Bernake is doing to our long term economy ? Or Obama is doing to our economy?

He actually has it right. Interest rates cannot increase if the supply of bonds < demand unless there is real economic growth.

Banks are holding record reserves, with off balance sheet debt climbing as our population grows and ages.

Banks don't control reserves. Even if a bank lent every penny it had in excess reserves, it would still show up as a reserve in another account. How can you be discussing such topics and not be aware of this?
 
There isn't going to be a spike in yields just like
there wasn't a spike in inflation when QE was first implemented.



The same way government funds its spending now, by selling bonds...

Sorry, I just can't take your uninformed opinion seriously. The stopping of this unprecedented QE will cause itnerest rates to rise and you want us to pay for single payer by borrowing more money ?

From who ? Ourselves ? You advocate for the exponential increase of our debt to pay for healthcare and ofcourse the debt service ?
 
Sorry, I just can't take your uninformed opinion seriously. The stopping of this unprecedented QE will cause itnerest rates to rise....

Are you really willing to go there?
 
Sorry, I just can't take your uninformed opinion seriously.

lol

The stopping of this unprecedented QE will cause itnerest rates to rise

Uh, yeah, interest rates will rise. That's the entire point of tapering.

and you want us to pay for single payer by borrowing more money ?

Definitely.

From who ? Ourselves ?

Bond buyers.

You advocate for the exponential increase of our debt to pay for healthcare and ofcourse the debt service ?

Yes, though it wouldn't be "exponential".
 
lol




Uh, yeah, interest rates will rise. That's the entire point of tapering.



Definitely.



Bond buyers.



Yes, though it wouldn't be "exponential".

Yes, higher interest rates with a stagnant economy and a massive debt payment as all of those short term securitiesthe Fed owns matures.

And WHAT "bond buyers " ?

Right now the biggest purchaser of US bonds is the FED. If the Chinese ever devalue their currency to their target level they will stop buying our bonds.

So your'e saying a move into single payer could be fininanced by monetizing our debt in perpetuity ?

Or the occasional 50 dollar bond your Grandmother might give you on your 5 birthday is enough to fina.ace single payer ?
 
What causes yields to increase?





He actually has it right. Interest rates cannot increase if the supply of bonds < demand unless there is real economic growth.



Banks don't control reserves. Even if a bank lent every penny it had in excess reserves, it would still show up as a reserve in another account. How can you be discussing such topics and not be aware of this?

What causes yields to increase today ? Stopping QE and the bond market is being influenced by the FEDs QE.

And what economic growth ? Because the Feds basing its decision on unemployment data, which is being reported without the context that would make a accurate indicator of our economic situation.

A lower number with a record low participation rate and 1.8% GDP. Yup, time to raise those interest rates....

And yes I know, the Fed controls the reserve level but the reserve level is relevent because of the FEDs paying banks interest on those reserves to manipulate the over night rate, which has a effect on short term interest rates.

Who's buying up all of our short term Bonds ? Got to keep all that new debt cheap.

And all that credit Bernakes creating as he knocks down the value of the dollar ? Its going into the asset markets and not the economy.

So why continue ?
 
Yes, higher interest rates with a stagnant economy and a massive debt payment as all of those short term securitiesthe Fed owns matures.

Fed tapering is based on specific economic indicators. If those indicators don't satisfy Fed benchmarks then they won't taper...

And WHAT "bond buyers " ?

Right now the biggest purchaser of US bonds is the FED. If the Chinese ever devalue their currency to their target level they will stop buying our bonds.

Not only are you a conspiracy theorist, but you are also completely ignorant as to how US debt issuance works.

So your'e saying a move into single payer could be fininanced by monetizing our debt in perpetuity ?

Yes.

Newsflash: We're already monetizing our debt in perpetuity.
 
Fed
tapering is based on specific economic indicators. If those indicators don't satisfy Fed benchmarks then they won't taper...



Not only are you a conspiracy theorist, but you are also completely ignorant as to how US debt issuance works.



Yes.

Newsflash: We're already monetizing our debt in perpetuity.

First, Bull sh**. Bernake mentioned stopping QE possibly later this year and he's basing that on positive economic indicators ? Because initially his cut-off point was 7% unemployment.

So you agree ? That later this year we're going to be economically "stable " ? You know so bernake can stop loading up the asset markets with easy money, OR continue on with what amounts as the largest tax increase on the American people as the economy stagnates.

So far all QE has accomplished is to remove untold amounts of interest payments from the private sector and pay the Treasury off as bankers and Wall Street take advantage of easy money and low interest rates.

And NO, your'e the ignorant one. The estimate of the " Treasury Borrowing Advisory Comittee " is a quadrupling of the " weighted average cost " of financing US debt over the next 10 years. And some speculate that number is Conservative.

Maybe the CBO is ignorant on the process of debt service too, huh ?
 
So far all QE has accomplished is to remove untold amounts of interest payments from the private sector and pay the Treasury off as bankers and Wall Street take advantage of easy money and low interest rates.

The most important risk of the US financial policy is social upheaval – class friction. One of the themes I have posted often is how the election strategies of both parties have grown to emphasize class warfare; get elected with the “Robin Hood” strategy or the “hold back the unruly looters” strategy. It is win by fractionation over unification. This has become more and more acceptable and dangerous as wealth has concentrated steadily and inexorably in a few percent of the population since about 1980. The Fed’s policy has really accentuated this problem – as holders of stocks and various investment instruments have benefited from the high stock prices while the majority of American’s have insufficient income to accumulate the wealth needed to get this benefit. In effect , the Fed has indirectly channeled much of the money supply expansion to those who are wealthy enough to invest it. The “Occupy Wall Street crowd” makes emotional protests from the obvious trend, but they blame “the corporations” and fail to see that it was really federal monetary policy at the root of the trend. Ironically they want the Fed to do more to “stimulate the economy”.
 
The most important risk of the US financial policy is social upheaval – class friction. One of the themes I have posted often is how the election strategies of both parties have grown to emphasize class warfare; get elected with the “Robin Hood” strategy or the “hold back the unruly looters” strategy. It is win by fractionation over unification. This has become more and more acceptable and dangerous as wealth has concentrated steadily and inexorably in a few percent of the population since about 1980. The Fed’s policy has really accentuated this problem – as holders of stocks and various investment instruments have benefited from the high stock prices while the majority of American’s have insufficient income to accumulate the wealth needed to get this benefit. In effect , the Fed has indirectly channeled much of the money supply expansion to those who are wealthy enough to invest it. The “Occupy Wall Street crowd” makes emotional protests from the obvious trend, but they blame “the corporations” and fail to see that it was really federal monetary policy at the root of the trend. Ironically they want the Fed to do more to “stimulate the economy”.

While I am not a big fan of QE3, the argument that it has only helped the wealthy is the type of class warfare nonsense that you refer to above. Buying MBS took mortgage rates down to very low levels. That not only helped the millions of Americans who bought homes, but also the people who were able to refinance. Lower long term rates have also helped the auto industry as so many cars are leased. Just look at what the hint of tapering has done to housing and auto stocks.
 
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