Treasuries Getting Slaughtered

[adios]

Yields from 2-10 years, the portion of the yield curve where the bond market sets to rates, have increased by about 50% since yields hit there lows in June. Monster sell off since last Fed meeting. The yield curve is off the charts steep. Mortgage rates have increased as well which should slow the refinancing boom which will therefore take away one contributer to economic growth. I don't care how many folks go on TV and state that higher yields won't be a problem for stocks, at some point they will be. The optimist would state that rates moving higher means a big economic recovery is in the making. A pessimist would say that government issuance of treasury debt is causing rates to rise. Greenie keeps stating that he's going to keep short term rates low for longer than he might even as the economy rebounds. I think if Greenie sees signs that the unemployment rate is abating he'll jack up fed funds quickly.

[Wildbill]

The rates are going up because the market is having its usual fits. The market has such an attitude these days, they act like Alan better follow us or else. Well he didn't follow them on the 50bp cut last time and the Fed hasn't bought the bonds that it hinted it could do so here is your reaction. Its just hedge funds and leveraged bets really. The market is out gambling it can predict the Fed's moves and the one time it bet wrong and its showing its "displeasure". Other things could be small factors, but lets face it these leveraged bets are huge and unwinding them can move the markets very strongly.

I doubt the Fed will raise rates that fast. There just isn't the need for it because inflation is so low worldwide. Also the last thing the Fed would want to do right now is make the dollar stronger than it already probably will get if the economy really is growing because Europe and Japan aren't. The biggest factor to watch is China. Their supposed new threats to Taiwan could spark some movement. Also at some point they are going to have to revalue the currency, it makes no sense anymore to continue to leave it so strong if it just is going to cut the throats of the very economies it needs to be strong.

[AceHigh]

China currency does not float right now, instead it's tied to the dollar. However, China wants to join the World Trade Organization and one of the requirements of the WTO is that your currency floats. I think they have until 2080 or 2010 to start floating there currency.

[Aragorn]

The NY Times had an interesting article about this yesterday. Apparently the increase in rates is killing the re-fi business. The rate of re-fi's has dropped in half. With this housing money being a major stimulus, it is not a great thing for the economy.

They have some other explanations, other than the Federal debt, mostly having to do with the fact that the Fed has just about run out of stimulus.

This still seems like a shakey economy to me. I don't see disaster ahead, but I see far from all smooth sailing.

[GeorgeF]

As to bonds you may be interested in:
www.pimco.com (http://www.pimco.com) bond guru Gross has become bearish and is suggesting TIPS, short durations, foreign (not US$) currencies.

Another bond guru sticks with the bull case for bonds, long term zeros are the way to go.
http://www.hoisingtonmgt.com/hoisington_economic_overview.htm

As far as the Chineese go, these are my undeucated thoughts:
1) If the Chineese revalue the Yuan by 15% that means all those bonds/mortgages they bought are worth 15% less to them instantly. Do you really think that the chineese really want that? Maybe the chineese are old fashioned and think that debts should be paid back with real not devalued money.

2) Right now currencies/bonds are a fixed game. Central banks control the bulk of the trading. They are only able to fix the game because the yuan does not float. Once the yuan floats the CBs will not be able to control the game and that is freightening. Why wouldn't the dollar system collapse just like the gold system did before?

3) Let the yuan float, so what. What if the cost of labor in China is flexible. Maybe they will just cut wages to stay competitive.