Treasury Burst Is Now
The treasury bubble has officially began its burst. A recent government auction of treasury bonds was a virtual flop, and the Chinese have slowed, nearly ceased, all additional purchases of Treasury bonds. The bond bubble’s burst is near, very near, and the actions taken to keep it from bursting has only made the bubble that much worse.
Inflation and bonds are like orange juice and minty toothpaste, the mix simply doesn’t work. Its gross, its disgusting, and no one likes it. Bond traders hate inflation, it means they have to buy bonds on the cheap to maintain their spending power against the threat of inflation.
Unfortunately the only tool at the Fed’s disposal for keeping rates low is inflation. Interest rates are low when there is an ample supply of cash, and they’re high when the money supply is small. That is of course in a truly free market, any more the Fed just prints up cash to make interest rates low and contracts the money supply to push rates up. But enough hating the Fed, back to the treasury bubble…
Treasury yields are exploding! The government has to sell debt to cover previous, expiring debt, and its also trying to cover its record deficit this year. That amounts to a load of treasuries that must be sold, and econ 101 tells us that more means less value per bond. And when you pay less money for a bond, the yield goes higher.
The chart below looks great, until you get to the last couple of weeks. From April 20 to May 6, yields soared from 3.69% to 4.28%, thats no small change.
If treasury auctions keep failing, investors have a lot to worry about. This trend has a huge affect on the future of mortgage rates, which are yielding only .6% more than treasuries at this point in time. There needs to be a much bigger spread than just .6%, as government can always print money to pay you back, a small time borrower can’t without breaking the law.
Mortgage rates are headed higher if the Fed’s quantitative easing money doesn’t push down rates again. Any future easing though could send rates higher, not lower, as investors consider the effects of inflation.
I can see the supply of money getting more difficult in the fall which will have a very a real impact on mortgage rates again. This in turn could distroy the little optimizm that is surfacing.