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Posts Tagged ‘government bond markets’

Did you ever wonder why mortgage rates have been so low this year?  Well, let me take you on a journey.  Mortgage rates are influenced by government bond interest rates.  Government bond interest rates are influenced by the price of Government bonds.  If bond prices go up, then interest rates go down.  In order to raise the money to pay for all of the irresponsible spending of the Government, the Treasury sells Government Bonds.  Institutions, other countries, investment firms, etc. buy the bonds from the Government.  That money then goes to work to pay for all of the spending created by the Government.

The Government has a lot riding on those government bond sales or auctions.  If they go well, the Government sells the bonds and gets the money, bond prices go up, and interest rates stay low.  Since most people don’t want to lend the US money because we are in so much debt as it is, someone had to step in and help buy those bonds.  Yes, the Federal Reserve Board has been buying bonds all year creating more debt and keeping bond prices higher and interest rates lower.  I will not even go into how incredibly irresponsible it is for the US to buy its own bonds.  That goes without saying – the problem is that program is coming to a grinding halt at the end of this week following the largest bond auction on record this week – 123 billion dollars worth of government bonds to be issued.  The Fed will get out of the way and the bond markets will be allowed to function freely again.  That might not be so good.

Interest rates started going up today and are at a 2 month high.  What happens when you suppress something that should be going up and then stop?  It is like compressing a spring.  If you let go of the spring, it takes off.  I think that the same thing could happen with interest rates.  If this happens it could disrupt the credit markets, consumer interest rates will go up, businesses will have even more trouble borrowing money, and homeowners will now have trouble getting low cost mortgages. 

The stock market would have a tough time with raising rates.  However, the rising interest rates should help the dollar. If the dollar is going up, the price of gold should take a hit.  Welcome to Deflation!  The economy might start the debt detox process that should have started when this crisis started. 

If you are looking for a catalyst, this could be it.  Interest rate risk is not something that the stock market is ready to face.  However, China and others would certainly like to see the value of our dollar go back up.

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My boys have a book called the Bear Snores On.  It is a story about a bear that sleeps through a party that his animal friends had in the bear’s cave while he was sleeping.  The bear continued to sleep despite all of the noise going on around him.

Each page of the story would tell the activities of the party occurring while the bear slept.  The page would then end with “the bear snores on.”  Then all of the sudden the mouse sneezes and the bear wakes up.  Obviously, the bear wasn’t too happy. 

The last few weeks have reminded me of that story.  As the stock market continues to go up, the bear market seems as if it is going to continue to stay asleep in the cave.  The data that has come out lately has been anything but encouraging when it comes to a sustainable recovering economy and stock market.

Before I go further, most people would argue that the news is always worse when we are the bottom.  I don’t disagree.  The problem is that I don’t think that we are at the bottom.

The latest foreclosure information shows home foreclosures are still occurring at a rapid pace.  According to data, a record 12 percent of homeowners with a mortgage were behind on their payments in the first quarter.  A concern that I discussed weeks ago was the type of borrowers that were going into foreclosure.  Borrowers with good credit make up a larger percentage of these foreclosures…and the bear snores on.

Last week we also saw something very concerning occur.  In order to get out of this mess, one key ingredient will be lower interest rates.  Rising interest rates in an economy mixed with debt is not a good sign.  Rising interest rates would also indicate that the Federal Reserve manipulations with the credit markets are not working.  This would leave the economy very vulnerable. 

So, how do you know that this is occurring?  You watch the government bond markets.  The consumer interest rates fluctuate based on what is happening in the government bond markets.  Probably the best interest rate is the 10 year government bond rate.  As interest rates go up, bond prices go down.  In order for the Government to borrow enough money to get out of this mess, we need lower interest rates.

However, the opposite is occurring.  Foreign countries are stating that interest rates must be higher.  They want to higher interest rates on their money that is being loaned to the US Government.  Thus, you are seeing a rise in interest rates.  We saw this occur last week when interest rates really spiked upwards in one day’s time.  Following that one day, interest rates began to fall again.  However, this morning we are seeing a repeat of last week and watching as the stock market continues to go up at the same time.

And the bear snores on…

I suspect that we are looking at a situation where this bear market is not going to be asleep much longer.  My indicators are still showing that tremendous risk is being ignored.  This was no different than in October 2007 when the market was hitting new highs.

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