U. S. bond market and the point of no return
RedTiger
Posts: 5,608 ✭
Some pundits are saying Italy has reached a point of no return, or a tipping point as the ten-year Italian bonds touch 7%. Old timers know that 7% isn't that big of a deal in terms of interest rates. What turns it into scary news is the size of the debt, and how fast the rate rose. Earlier this year Italian bonds were in the low 4% range.
The big question for U. S. investors is when does this happen here? Ten year U.S. bonds are in the 2% range right now. If they move to 7%, which again, isn't all that high in absolute terms, that destroys an already weak housing market (think another 50% down across the board, with weaker properties down another 80%), stocks likely get cut in half or worse.
As the little kids might say on the roadtrip "are we there yet?"
The Fed has spent $2 Trillion openly buying U. S. bonds, and that is the biggest reason U. S. rates remain at record lows. At some point the game ends. QE can not go on forever. There aren't enough fools in all the world to keep buying U.S. bonds forever. Though like most I have been surprised at how long the U. S. bond market has remained strong.
One of my young relatives has been following the news about Greece (and now Italy) and asked, "doesn't the U.S. have the same problem? A huge and unsustainable debt?" 7% of 15 trillion means a trillion a year in interest payments. Yikes.
The big question for U. S. investors is when does this happen here? Ten year U.S. bonds are in the 2% range right now. If they move to 7%, which again, isn't all that high in absolute terms, that destroys an already weak housing market (think another 50% down across the board, with weaker properties down another 80%), stocks likely get cut in half or worse.
As the little kids might say on the roadtrip "are we there yet?"
The Fed has spent $2 Trillion openly buying U. S. bonds, and that is the biggest reason U. S. rates remain at record lows. At some point the game ends. QE can not go on forever. There aren't enough fools in all the world to keep buying U.S. bonds forever. Though like most I have been surprised at how long the U. S. bond market has remained strong.
One of my young relatives has been following the news about Greece (and now Italy) and asked, "doesn't the U.S. have the same problem? A huge and unsustainable debt?" 7% of 15 trillion means a trillion a year in interest payments. Yikes.
0
Comments
I don't think we're the last to go down... just the next to last.
<< <i>shortly after they take us out china will go.
I don't think we're the last to go down... just the next to last. >>
Now you are writing like me. "They?" Who is they? And what would motivate "them" to take out both the U. S. and China? Not much profit in that move, vs. some other moves that can be tried, as compared to the damage it does to the system.
And, eventually, as things go south... there will be more players in the "they" camp.... why not pile on to the winning trade???
have to perform, they will continue to keep a tight lid on interest rates. And the bankers are continuing to add to this pile to ensure the lid stays tight.
roadrunner
Knowledge is the enemy of fear
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
<< <i>FED will continue buying bonds as long as it has to. Bonds will eventually be forced upon retirement holdings. While there is an eventual end to the madness, the US will position itself, via the FED, to be one of the last to fall. >>
This is exactly what they have done in Japan.
Last to fall will be the one least dependent on importation of necessary goods
Which is what I have been saying, that there are very few countries that can feed and provide energy for its people. The USA and Canada (USA-north division) win this contest hands down.
Knowledge is the enemy of fear
United we stand, divided we negotiate.
"Name one nation in the world that is prosperous because it borrowed money?"
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
As forthe natural resources, us and Canada can handle feeding power it's own populace if it came to that. I belies that smarter minds than myself saw this, and that's why the policies etc. are set up to purchase all of the oil and import it to the us, without tapping our reserves.
And keep in mind, the us is buying in dollars, which are just paper as we all know.
As for the euro and financial systems in general system, I liked the comment about how the bankers/elite whoever benefits from this system have a vested interested I keeping it open at all costs. Which is precisely why the euro system will survive over the long haul. Too many of these elite/powerful want to keep it running.
Box of 20
We can't have a new world order if the same guys are still in charge. By allowing the PIGS to fail aolong with the Euro then the same old guys lose their cheese and the world order will change as a result. Unfortunately, the US is not in any position to take advantage of the opportunity.
<< <i>TBT >>
There was a thread on this forum, maybe 2 years ago, with a couple of forum hotshots recommending TBT for a long term can't miss winner. Unfortunately, TBT had a 40 handle when they were recommending it (now about 20). Can you say "ouch?"
/edit to add: I took a small trading position in TBT on 11/10/11.
<< <i>Hundreds of Trillions worth of otc interest rate contracts have gone to help keep interest rates low for the past half dozen years. As long as those IR contracts don't ever
have to perform, they will continue to keep a tight lid on interest rates. And the bankers are continuing to add to this pile to ensure the lid stays tight.
roadrunner >>
Not sure I follow the logic. Derivatives prevent U. S. rates from rising, but permit Italian rates to skyrocket? Huh? They trade options and swaps in Italy too. With that kind of logic, any move, any non-move, or any mega-move can be blamed on derivatives. Sounds like way too pat an answer, even if there might be some truth to it. Gold skyrockets, it was the derivatives. Gold plunges, it was the derivatives. Italian bond yields skyrocket, it was the derivatives. U.S. bond yields stay at record lows for extended periods of times, it was the derivatives. Ok, if a person wants to believe that, more power to them. I have my own biases, as an active options trader.
Then, there's always the question of what happens if *they* get kicked out. Would the next bunch be better, especially if they figure out how to throw out the Constitution outright, instead of piecemeal? Somehow I doubt it.
I knew it would happen.
AND BTW, the $400,000 a year salary cost about $750,000,000 to get. When anyone can splain that logic, please feel free.