Tuesday, November 11, 2008

The Debts of the Spenders: Storm Clouds Gather Over Treasuries Pt 2

Treasury bond investors - such as pension funds and other institutions - stand to lose billions and potentially trillions of dollars in the coming months.


Higher interest rates on future bond issuances will lower the value of existing treasury holdings. This is unlikely to be a problem w/shorter term issuances such as the 3 year or lower maturities. However, it spells big trouble for bonds that have longer dated maturities.

10 year Treasuries still offer yields below 4% (roughly 3.75-3.8% the last time I checked). Throw in several more trillion dollar bailouts of the financial, auto, insurance, and other industries currently begging at Washington's doorstep and you have the formula for a meteoric rise well north of 4-5%.

Rising inflation is also a problem in the future as the US government continues to run their printing presses 24/7.

Ironically, a steep yield curve has been beneficial to banks as it reduces their borrowing costs while raising the return on their loans. This is yet another example of Paulson and Bernanke's unintended consequence of unlimited bailouts: robbing Peter to pay Paul.