Friday, December 17, 2010

What Is The Back Up In Ten Year Treasury Rates Telling Us

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I have started to sense a heightened level of enthusiasm for those who wish and believe the U.S. will default on its debt obligations.  This because longer term Treasury rates are rising.   Bond rates go up for many reasons just like stocks go up for many reasons.  There are going to be an endless array of bond crises around the world until the entire system likely implodes but there is absolutely nothing that points to any such imminent danger in U.S. Treasuries.  To the contrary, with the Federal Reserve buying bonds, the U.S. can issue Treasuries all day long.   The Federal Reserve and Treasury dealers could easily handle the load of U.S. debt issuances even if there is not a single buyer.  That is, as long as our banking system doesn’t crater again.   Of course, we pretty much wrote this with the start of quantitative easing 2.  ie, The Federal Reserve had changed the game.  At least for now.   Ultimately there will be future stresses on our banking system but it isn’t Treasury issuances for now.

Let’s look at the more likely reason why rates are rising.  Above is the Ten Year Treasury in gray and the mega banking or Wall Street index in red.  Hedge funds and Wall Street traders have rammed the mega banking index up 20% in literally a week.   It is no coincidence that Treasury rates are rising in concert with the banking index.  This is more Frankenfinance.  It’s simply an anticipation of rising bank profits from rising interest rates or the carry trade.  ie, Borrow from the Federal Reserve for nothing and buy U.S. Treasuries for a supposedly guaranteed 3.5ish%. 

Treasuries are more than likely rising because of economic enthusiasm from Wall Street.  Although there are many bonds around the world that are rising for less than pleasant reasons.   

This is very consistent with Wall Street sentiment being off the rocker positive. 

Remember, we wrote on here some time ago that Wall Street is going to need the Federal Reserve to start buying stocks and commodities.  There is no counterparty to absorb their supply.  Wall Street is the dumb money. This is a simple truth that I haven’t seen discussed anywhere else. 

posted by TimingLogic at 8:51 AM

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