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U.S. 10 Rate climbs to 2.52%

cpwill

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At the beginning of 2013 it was 1.86%, meaning that Treasury yields have seen a little over a 35% increase in the last 6+ months.



If they don't drop back down to closer to 1%, then this will be a blown-prediction of mine; I had thought that US Treasuries would serve as a flight to safety destination for money leaving Europe, Japan, and China, but that the asset class of sovereign debt itself might become less trusted, producing a follow on rapid climb.
 

specklebang

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And this change is bad why? How are they less safe?


At the beginning of 2013 it was 1.86%, meaning that Treasury yields have seen a little over a 35% increase in the last 6+ months.



If they don't drop back down to closer to 1%, then this will be a blown-prediction of mine; I had thought that US Treasuries would serve as a flight to safety destination for money leaving Europe, Japan, and China, but that the asset class of sovereign debt itself might become less trusted, producing a follow on rapid climb.
 

finebead

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The speed of this increase surprised me. I have seen the bond market overshoot on the upside, followed by an overshoot to the downside (yield), and then cycle to the target. The experts say rates need to return to normal sometime, and winding down QE slowly is all the FED has announced, they said short rates would stay where they are now until likely 2015. It seems like an over reaction for what was announced. I haven't held bond funds for a long time, years, for just this reason, when it goes against you, you can lose 2 or 3 years of interest in your principal loss very quickly if you are not watching. I think the 30 year was down 9% the last month, so you could have lost 4 or 5 years of interest, which is why I say rates spiked faster than I thought they would.

Let's see what next week brings.
 

specklebang

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I get that but why is it less safe? Rates are ridiculously low. They screwed up my retirement plan! But safety has to do with can you pay me and we are the main source of US Dollars so why is it...you know what I mean.



We are starting to be charged more for our public debt.
 

austrianecon

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I get that but why is it less safe? Rates are ridiculously low. They screwed up my retirement plan! But safety has to do with can you pay me and we are the main source of US Dollars so why is it...you know what I mean.

10 year is also the starting point of most fixed mortgages plus what ever fee a bank puts on it. It's also a problem because Helicopter Ben (Ben Bernanke) can't explain how bond rates can be rising while the Fed is buying bonds.
 

specklebang

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If Ben's Bond Buying Cartel is going to stop the presses, interest might rise (I'm definitely not an economist) and he hinted that some day, before the sun becomes a red dwarf, he may stop. Interest rates are so ridiculously low, they can only go up from here since down has been used up. Even when interest rates were much higher - much, much, much higher - the country still functioned. People still bought houses and cars. So, we should survive a point or two.


10 year is also the starting point of most fixed mortgages plus what ever fee a bank puts on it. It's also a problem because Helicopter Ben (Ben Bernanke) can't explain how bond rates can be rising while the Fed is buying bonds.
 

specklebang

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****. I lost track of the topic. You didn't say why it was less safe. What does safety have to do with interest rates?



10 year is also the starting point of most fixed mortgages plus what ever fee a bank puts on it. It's also a problem because Helicopter Ben (Ben Bernanke) can't explain how bond rates can be rising while the Fed is buying bonds.
 

austrianecon

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If Ben's Bond Buying Cartel is going to stop the presses, interest might rise (I'm definitely not an economist) and he hinted that some day, before the sun becomes a red dwarf, he may stop. Interest rates are so ridiculously low, they can only go up from here since down has been used up. Even when interest rates were much higher - much, much, much higher - the country still functioned. People still bought houses and cars. So, we should survive a point or two.

Interest rates have been rising for over a year even before Ben said they were thinking about cutting back buying. So that's a wash. US didn't have 16 trillion in debt when rates were above 3% either. So eh..
 

austrianecon

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****. I lost track of the topic. You didn't say why it was less safe. What does safety have to do with interest rates?

Interest rates are a function of what someone is willing to loan you money at. Higher the rate, the more risky they think you are. US over the last 4 years has enjoyed the rest of the world being a complete mess (and still is) yet US rates are rising.. questions that need to be asked and answered (personally that is).. if the world is doing crappy yet US rates are rising.. is the US more safe of or less safe of a bet?
 

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10 year is also the starting point of most fixed mortgages plus what ever fee a bank puts on it. It's also a problem because Helicopter Ben (Ben Bernanke) can't explain how bond rates can be rising while the Fed is buying bonds.

Expectations of growth for one, look at the world markets. This shows interest rates for 10 yr bonds for various governments:

10y_yields_jun_13.gif

Also to some degree the anticipation of fed qe tapering off when unemployment drop belows 7%. There have also been some wild stories of a USD/CNY carry trade unwinding recently due to the raising interest rates, which could explain some of the increases in the later part of this week.
 

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Interest rates have been rising for over a year even before Ben said they were thinking about cutting back buying. So that's a wash. US didn't have 16 trillion in debt when rates were above 3% either. So eh..

At present debt levels, apparently for every 1% rise in interest rates, the national debt service costs rise $200 billion/year. Or $1 trillion for 5%.

Plus, it effects the housing market, which took years to begin to recover on the backs of record low rates. I would think a somwhat similar situation would be car sales.
Both of these have done well lately (the latter more then just lately) on the backs of extremely cheap credit - what happens if that diminishes?

Finally, what if rising interest rates starts affecting the CPI (as much as a joke as it is right now)? If it starts nudging 2.5%, then the wheels start coming off the whole Fed spending spree - and the stock market rally with it.
(Though the latter seems a long way away).

My point is this whole central bank money 'printing' circus is completely dependent on low inflation and low interest rates.
They are skewing the former by altering the CPI tabulation process so it is lower.
But even with all the bond buying, the Fed cannot seem to stop interest rates gradually rising.

What if that gradual starts to be become significant?

I assume the Fed would have to step in even more...especially if Yellen takes over for Bernanke.

But surely even they have a limit.

Although, imo, Janet Yellen makes Ben Bernanke look like a semi-Austrian schooler. She is a Keynesian Queen-in-waiting.
 
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JP Hochbaum

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SO essentially the federal reserve will receive a higher yield for all those bond purchases, as will any US citizen who has them. More money = good news!
 

austrianecon

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Expectations of growth for one, look at the world markets. This shows interest rates for 10 yr bonds for various governments:

View attachment 67149305

UK, Canada US expectations of GDP and reality of GDP are different. UK and Canada have missed big time over the last year. US has missed as well. If the Bond rates are rising over in these countries over .3% to 2.5% annualized growth then they are in a world of hurt when the economy actually does grow at normal levels.

Also to some degree the anticipation of fed qe tapering off when unemployment drop belows 7%. There have also been some wild stories of a USD/CNY carry trade unwinding recently due to the raising interest rates, which could explain some of the increases in the later part of this week.

You can't anticipate bond rates in June of last year to about March of this year going up when the Fed (any of it's members) made no mention tapering. That's wish full thinking to say this. USD/CNY carry trade? This makes no sense either as that's not the cause. It's Abenomics that's the problem. With Japan bond buying it's causing a squeeze on the USD/CNY carry trade via the bond market.
 

austrianecon

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SO essentially the federal reserve will receive a higher yield for all those bond purchases, as will any US citizen who has them. More money = good news!

Umm, no. US citizen and Government will have to pay more to lenders (Fed or whoever), meaning less money for Government budget.
 

JP Hochbaum

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Umm, no. US citizen and Government will have to pay more to lenders (Fed or whoever), meaning less money for Government budget.

U.S Citizens don't pay the bonds, they receive the yields by investing in them.

And all this means is that the feds only have to print more money.
 

drz-400

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UK, Canada US expectations of GDP and reality of GDP are different. UK and Canada have missed big time over the last year. US has missed as well. If the Bond rates are rising over in these countries over .3% to 2.5% annualized growth then they are in a world of hurt when the economy actually does grow at normal levels.



You can't anticipate bond rates in June of last year to about March of this year going up when the Fed (any of it's members) made no mention tapering. That's wish full thinking to say this. USD/CNY carry trade? This makes no sense either as that's not the cause. It's Abenomics that's the problem. With Japan bond buying it's causing a squeeze on the USD/CNY carry trade via the bond market.

The point of my first graph was to show that it is clearly not just the actions of the fed that are causing the rise in interest rates. I believe it to be expectations of future growth. So economies may not actually be in a world of hurt when we do achieve normal growth rates, as the market will have already set interest rate based upon its estimates of these future growth rates rather than the current growth rate. Generally world markets tend to move with similar trends, so if you think that interest rates are rising due to expectations of higher gdp growth, this would generally manifest itself in higher interest rates than just US markets, which is what that chart shows.


Bond rates have traditionally dropped prior to QE rather than after because markets generally set interest rates based upon what they think is gonna happen in the future. The feds QE purchases were things that everyone saw coming, especially when the market remained weak. Now that the economy is strengthening and the Fed will inevitablely have to raise rates at some time. These expectations will likely start to be reflected in markets.

http://www.econbrowser.com/archives/2013/06/QE2_3_announce.gif

As to Abenomics, I believe similar to the possibility of the US tapering QE next year, chinese markets are reacting to a possible reversal of Abenomics. Rather than bond purchases putting a squeeze on the carry trade (therby allowing cheap money to flow into china), an end to these purchases would actually put a liquidity squeeze on chinese markets.
 

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specklebang

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OK, maybe I can consolidate my response.

In a way it is true that the value of interest depends on "what the market will bear" but is that really the way it works? If I asked you to lend me money at 1% you would (rightfully) laugh at me. So much to lose and so little to gain. If we look at real interest rates, such as car loans or credit loans, we see rates are many times higher than our so-called government rates. The only beneficiaries of these low rates are bankers who can take money out and lend it for many multiples of their cost.

Now, lets look at Treasuries. The rates are incredibly low so why would they be so popular? Because there are people who have unconscionable amounts of money. We have billionaires all ove the place. They have to put their money somewhere other than under their mattress. So, despite the negligible return, they like Treasuries because you absolutely, positively will get your money back when you are entitled to it. The extent of US debt doesn't matter to the lender - the US will absolutely give you your dollars even if we at DP have to stay up all night printing them.

Sure, the USG wants to keep rates low because they owe so much that the cost of interest to them is a factor. But in terms of safety - nothing can be safer than the full faith and credit of the USA.

Remember, I only questioned the concept of "safety". I'm not arguing for more debt. Personally, I would be better off if rates were higher because I'm a retiree and 20 years ago, if you told somebody rates would drop below 1%, they would have thought you insane. So, I don't get the ROI I had hoped for but that's just me. I don't need treasuries, I just keep my money in the cat carrier.




A thirty five increase in the price of rolling over our debt ain't good.
we've made alot more of them, for one.

Interest rates are a function of what someone is willing to loan you money at. Higher the rate, the more risky they think you are. US over the last 4 years has enjoyed the rest of the world being a complete mess (and still is) yet US rates are rising.. questions that need to be asked and answered (personally that is).. if the world is doing crappy yet US rates are rising.. is the US more safe of or less safe of a bet?

Interest rates have been rising for over a year even before Ben said they were thinking about cutting back buying. So that's a wash. US didn't have 16 trillion in debt when rates were above 3% either. So eh..
 

austrianecon

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U.S Citizens don't pay the bonds, they receive the yields by investing in them.

And all this means is that the feds only have to print more money.

Umm.. better check the US budget. Interest payments are part of the mandatory budget. As Bond issuance is part of the Department of Treasury. :2razz:
 

austrianecon

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The point of my first graph was to show that it is clearly not just the actions of the fed that are causing the rise in interest rates. I believe it to be expectations of future growth. So economies may not actually be in a world of hurt when we do achieve normal growth rates, as the market will have already set interest rate based upon its estimates of these future growth rates rather than the current growth rate. Generally world markets tend to move with similar trends, so if you think that interest rates are rising due to expectations of higher gdp growth, this would generally manifest itself in higher interest rates than just US markets, which is what that chart shows.

But your chart isn't showing that. If you look more in depth of within those countries you'll find that all of them have missed their GDP forecasts so this expectations of future growth doesn't exist. That in the UK higher interest rates could point to deficit problem despite BoE not changing it's QE position as .3% growth rate isn't something to be giddy about. It's this kind of failed assumption which misses underlying problems I was pointing to. Never assume the bond market is forecasting growth.


Bond rates have traditionally dropped prior to QE rather than after because markets generally set interest rates based upon what they think is gonna happen in the future. The feds QE purchases were things that everyone saw coming, especially when the market remained weak. Now that the economy is strengthening and the Fed will inevitablely have to raise rates at some time. These expectations will likely start to be reflected in markets.

Of course they traditionally dropped. But they really haven't. There are two parts to a bond. Price and Yield (coupon). What Bond traders do is bid up the price and lower the yield. So for example a US 10Y is issued at $752.60 @ 2.474% (US does $1000 bonds), if traders think (or know) the Fed is gonna buy bonds they will drive up the $752.60 to a higher number while driving down the 2.474% interest.

The economy is not strengthening. Huge misnomer that's gonna blow up in a lot of people's faces. China is about to crash and burn, Europe is still not fixed and the US has underlying labor issues.


As to Abenomics, I believe similar to the possibility of the US tapering QE next year, chinese markets are reacting to a possible reversal of Abenomics. Rather than bond purchases putting a squeeze on the carry trade (therby allowing cheap money to flow into china), an end to these purchases would actually put a liquidity squeeze on chinese markets.

Japan isn't tapering anytime soon. It's a 2 year program. It started in April of this year. So it won't be over until 2015 at the earliest. But when that's over Japan's money supply will jump by 100%. Japan but economically blow up during that period as well or have to devalue the YEN officially.

China has a liquidity squeeze because the BoC wants it to have one. It has a bubble it needs to pop.
 

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But your chart isn't showing that. If you look more in depth of within those countries you'll find that all of them have missed their GDP forecasts so this expectations of future growth doesn't exist. That in the UK higher interest rates could point to deficit problem despite BoE not changing it's QE position as .3% growth rate isn't something to be giddy about. It's this kind of failed assumption which misses underlying problems I was pointing to. Never assume the bond market is forecasting growth.

From almost every forecast I have looked at, GDP growth for 2014 is expected to be higher than that for 2013. For every interest rate forecast I have seen, they expect them to rise over the course of the next few years. Now, these forecasts can be risen or lowered, but the fact remains, 2014 is still expected to have a higher growth rate than this year, in all of those countries. Why do you think all of these countries interest rates, regardless of their individual defecit issues, QE questions, etc are following a similar trend?

Of course they traditionally dropped. But they really haven't. There are two parts to a bond. Price and Yield (coupon). What Bond traders do is bid up the price and lower the yield. So for example a US 10Y is issued at $752.60 @ 2.474% (US does $1000 bonds), if traders think (or know) the Fed is gonna buy bonds they will drive up the $752.60 to a higher number while driving down the 2.474% interest.

The economy is not strengthening. Huge misnomer that's gonna blow up in a lot of people's faces. China is about to crash and burn, Europe is still not fixed and the US has underlying labor issues.

Interest rates did drop prior to QE2 and 3. I supplied a graph showing it. The US labor market is not perfect, but its better than last year. And next year it is expected to be better than this year. Do you disagree with that statement? If so, perhaps we should review why the market is expecting the federal reserve to begin "tapering" its QE purchases towards the beginning to middle of next year. The economy is clearly strengthening, the debate is about how fast, how the federal reserve will begin to unwind its low interest rate policies, and what effects this will have internationally.

Japan isn't tapering anytime soon. It's a 2 year program. It started in April of this year. So it won't be over until 2015 at the earliest. But when that's over Japan's money supply will jump by 100%. Japan but economically blow up during that period as well or have to devalue the YEN officially.

China has a liquidity squeeze because the BoC wants it to have one. It has a bubble it needs to pop.

Fair enough with the point about japans program lasting a while. I disagree with you that the asset purchases by the bank of japan are hurting china for reasons I have already posted. I agree the BoC could do something to stop the liquidity squeeze but personally I dont think it is because they are trying to "pop a bubble." They just found out that banks were performing an illicit carry trade by over stating exports to hong kong. I think the BoC is unwilling to help these banks as a matter of principle. So long as BoC does not see anything detrimental to future growth i dont think they see any reason to engage in a more easy monetary policy to supply liquidity to these banks.
 

austrianecon

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From almost every forecast I have looked at, GDP growth for 2014 is expected to be higher than that for 2013. For every interest rate forecast I have seen, they expect them to rise over the course of the next few years. Now, these forecasts can be risen or lowered, but the fact remains, 2014 is still expected to have a higher growth rate than this year, in all of those countries. Why do you think all of these countries interest rates, regardless of their individual defecit issues, QE questions, etc are following a similar trend?

Every year the GDP forecast shows growth, in 2008 it showed growth, so did 2009. It's about how much growth and how much that forecast is off by at the end of the day. Canada missed it's GDP call by almost 1% last quarter. Canada has actually missed 3 quarters in a row.

You assume GDP forecasts are the only part of bond rate calculation. It's not. See Canada all 2013.



Interest rates did drop prior to QE2 and 3. I supplied a graph showing it. The US labor market is not perfect, but its better than last year. And next year it is expected to be better than this year. Do you disagree with that statement? If so, perhaps we should review why the market is expecting the federal reserve to begin "tapering" its QE purchases towards the beginning to middle of next year. The economy is clearly strengthening, the debate is about how fast, how the federal reserve will begin to unwind its low interest rate policies, and what effects this will have internationally.

I am not denying your point. What you are ignoring is that bond rates lower because bond traders don't piss against the wind before QE happens. US labor market issues won't be fixed with job creation as the jobs being created are low wage jobs. But no.. the US labor market (jobs created) will be worse next year at this time as the US market is effected by the global economy. China goes belly up, then all bets are off.

The economy isn't strengthening if it was the Fed wouldn't have left an opt out clause in shutting down QE.


Fair enough with the point about japans program lasting a while. I disagree with you that the asset purchases by the bank of japan are hurting china for reasons I have already posted. I agree the BoC could do something to stop the liquidity squeeze but personally I dont think it is because they are trying to "pop a bubble." They just found out that banks were performing an illicit carry trade by over stating exports to hong kong. I think the BoC is unwilling to help these banks as a matter of principle. So long as BoC does not see anything detrimental to future growth i dont think they see any reason to engage in a more easy monetary policy to supply liquidity to these banks.

(P)BoC has already came out and said.. it's partly the carry trade but also big mea culpa in monetary policy. They also stated this with it.. "the country is about to undergo an unprecedented deleveraging that could amount to over CNY1 trillion in order to force reallocate capital in a more efficient basis." If you read the FT the other day you'll find it.
 
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