Economics

When you purchase a Treasury note you are lending money to the government for a specified period of time (i.e. 30 days to 30 years) at a fixed rate of interest or yield. The risk of default on Treasuries has generally been considered nonexistent.

The federal government, with assistance from the Federal Reserve, can always print money to pay its debts. But this isn’t without risks. Because printing dollars to pay debts devalues the existing stock of dollar. So while the nominal return is preserved…the inflation adjusted return goes negative.

In short, inflation destroys Treasury values for investors. To account for expectations of rising inflation, yields rise. But this presents another problem for long term Treasury investors.

When Treasury yields go up, Treasury prices go down. Over the last eight months, the yield on the 10-Year Treasury note has increased from 0.5 percent to over 1.54 percent – or 104 basis points.

Treasury investors stand to face major losses. Moreover, as interest rates rise, and borrowing costs become more expensive, several other things happen.

High priced stocks become less attractive. In addition, higher borrowing costs make it harder for over leveraged zombie corporations, state governments, municipalities, and Washington to roll over their debts.

... the great monetary inflation has already happened. The great price inflation is picking up, regardless of what the Bureau of Labor Statics’ bogus CPI report says. Thus, it is certainly possible that the yield on the 10-Year Treasury note could increase another 50-basis points come summer.

There could be corporate debt, hedge fund, and pension fund financial blow ups galore. But this is exactly what the Fed is trying to avoid. The Fed wants inflation without higher interest rates.

-- Fifty Basis Points To Disaster - ZeroHedge

Meanwhile, against this geopolitical backdrop we return from the summer to continue to see global markets which now aggressively buy equities for their yield and bonds for capital appreciation: which is a brilliant strategy until rates have been cut to new negative terminal lows and stock multiple expansion is at new highs: at which point the music stops and someone is left holding seriously over-priced and under-delivering cans. And nobody makes any returns at all – which will be a real big bang.

by Michael Every of Rabobank

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An interesting web site with much data and many charts, with one particular example: Gold to Oil Ratio Historical Chart

When reading about the Precious Metals, one can end up in the strangest places. One learns that the world is very interconnected. Underlying cause is not known for very visible effects.

A link to Comex Institutes Trading Collars For Precious Metals started my hop skip jump around. In simple terms, the CME expects higher volatility in the precious metals markets, particularly for gold and silver. For reasons yet unknown. The collars go in on Monday.

Derivatives and mass financial destruction talks about a worry that one or more G-SIBS (globally significant important banks) may fail. G-SIBS are counter-parties to a large fraction of $691 trillion gross nominal value in derivatives (about 9 times the global GDP). If there is instability in a major commodity market, say energy, and this instability vibrates through to other sectors via currency, credit or equity markets, insolvency may threaten G-SIBS via their lending and derivatives exposures. Various 'circuit breakers' are being enacted, with liability ultimately being transferred to government institutions. Continue reading "NWO: New World Order" »

Cumberland Advisors Market Commentary indicates that there have been 8.4 million American jobs lost due to the recession, and that it may take upwards of four years to recover those jobs. That would be a recovery of about 175,000 jobs per month, every month. Continue reading "Market Notes - 2010/04/02" »

Sometime this last week, someone made the observation of the fact that there was a 'hidden buyer' buying a large amount of treasuries during the weekly US Treasury auctions. There was speculation it might be the Chinese operating through private proxy parties.

The US government has a problem with all the money they are spending. Some one has to loan it to them. Hence the regular treasury auctions.

A couple figures came to mind. I believe I recall seeing that the Chinese have over one trillion US dollars due to trade imbalance between the US and China. Another figure has to do do with the fact that the US government has added over a trillion dollars to their defict through recent spending.

If you put those two numbers together, and tie them together with the 'hidden buyer' observation, perhaps it could be said that the Chinese are converting their US dollar currency holdings into US Treasury holdings. That way, not only have they made money through their exports, but they make additional revenue through the yields on the treasuries purchased.

Written by M. Jay Wells