Saturday, November 1, 2008

The Debts of the Spenders: Storm Clouds Gather Over 10 Year Treasuries

The bond markets rarely lie. I find them to be a reliable indicator of medium-long term economic sentiment.

Medium term government paper is another canary in the coal mine. Traditionally, 10 year notes occupy the middle ground between the extremes of short term (13 week - 2 year) and long term (30 year) paper. The fact that they are veering towards bearish sentiment is troubling for the US government.

The short term paper has seen yields driven down to below 0 at several points in October because of a flight to safety. Meanwhile, the longer term paper continues to maintain an upwardedly biased yield curve (despite some minor down movements also based on a flight to safety). This is no surprise as interest rate risk rises to match uncertainty when the time horizon expands.

Some commentators believed that medium term paper yields were supposed to fall. Instead the opposite happened. Rates rose.

I believe this is an ominous sign. EVERY SINGLE world government is flooding the bond markets w/paper. EVERYONE. Foreign Treasuries are doing this to finance the gigantic budget deficits arising from new bailouts and existing social spending programs.

The US government has to compete w/these new issuers for bond buyers' attention. While rates here are relatively low, they are sure to rise in the future.

Short term paper is continuing to offer low yields because they are the extension of central bankers' wills. However, central bankers are powerless to determine longer term interest rates. No. Long term rates remain under the domain of the markets.

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