Fed stumped by rate curve

[Guest guest]

I believe the long-term bond rates are going up because of investor worry over the value of the dollar and the future of the US economy. China has still be been US debt, but almost totally short-term bonds as opposed to the long-term bonds they had been buying. This means they see long-term bonds as too risky right now.

So, as demand switched from long to short-term, the rates on the long-term notes are rising. Why? The higher rates are an attempt to draw investors back into buying those instruments by offering a higher yield vs. the risk. Risky investments offer a higher rate of return because they are more likely to fail, but if they succeed, the payoff will be much greater. This is simply the market behaving as it should.

The Fed and the government should look at this and be very concerned. It means people are losing faith in the US economy because of the government's reckless spending and plans to spend even more. The new tax everything that isn't nailed down plans aren't helping either. Inflation worries are completely justified as well, though just how bad that will be is an open question. However, considering current deficits and the $63 trillion and growing liability for Social Security and Medicare, an amount some 5 times the size of the whole US economy, we could be in for wild inflation.

(This is the first part of the article.)

http://www.reuters.com/article/ousiv/idUSTRE54U1NZ20090531

WASHINGTON (Reuters) - The Federal Reserve is studying significant moves in the U.S. government bond market last week that could have big implications for the central bank's strategy to combat the country's recession.

But the Fed is not really sure what is driving the sharp rise in long-dated bond yields, and especially a widening gap between short and long term yields.

Do rising U.S. Treasury yields and a steepening yield curve suggest an economic recovery is more certain, meaning less need for safe haven government bonds and a healthy demand for credit? If so, there might be less need for the Fed to expand the money supply by buying more U.S. Treasuries.

Or does the steepening yield curve mean investors are worried about the deterioration in the U.S. fiscal outlook, or the potential for a collapse in the U.S. dollar as the Fed floods the world with newly minted currency as part of its quantitative easing program. This might be an argument to augment to step up asset purchases.

Another possibility is that China, the largest foreign holder of U.S. Treasury debt, has decided to refocus its portfolio by leaning more heavily on shorter-term maturities.

With officials still grappling to divine the factors steepening the yield curve, a speedy decision on whether to ramp up the Treasury debt purchase program or the related plan to snap up mortgage-related debt seems unlikely.

"I'm in wait-and-see mode," said one Fed official who spoke on the condition of anonymity. "We laid out the asset purchase plan and we're following it. That is going to have some affect on various interest rates, but together with a hundred other things. So I don't think we should be chasing a long-term interest rate," the official said. An Excellent Credit Score is 750. See Yours in Just 2 Easy Steps!

[Guest guest]

" The Fed and the government should look at this and be very concerned. It means

people are losing faith in the US economy because of the government's reckless

spending and plans to spend even more. "

Another reason to look at it is because most people do not understand bonds of

any kind. Mostly the smart and savvy investors do.

The average person buy bonds for different reasons: Maybe it's what their family

has always done. Maybe it's because they want a guaranteed fixed rate of return.

But knowing people the way I do, the average people don't buy bonds based on

economic indicators. If the average person understood economic indicators, they

would not be sufferring foreclosures and bankruptcy.

Large shifts in the bond market are indeed an indication that smart investors

foresee something that others do not. Because interest rates and yield tend to

be low, they are seldom bought into by larger investors unless they see no other

prospects for investment elsewhere, and if they want some kind of guaranteed

protection over their investment.

Worrying times indeed.

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