The bond market rules the world

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Why Are Long-Term Rates Going Up?
Maybe Lenders Think We're Screwed

"The whole world is deflating, but long-term interest rates are moving up. (See the chart for the 10-yr Treasury at right). Why?

Tim Geithner thinks it's because traders are recognizing that the economy's beginning to recover.

That's one happy theory. And it's possible (fingers crossed). But here are two less-happy theories:

First, long-term rates are going up because traders are getting nervous about future inflation. This is sensible. Given all the money the world is printing, it is quite likely that we're eventually going to have severe inflation, which will destroy the value of savings and bonds. The question is when that will start. (Japan has been able to postpone it for 15 years and counting).

Second, long-term rates are going up because traders are realizing that the world's big economies will need to issue trillions of dollars of new debt to pay for all their deficit spending...and there's just not enough dumb money in the world. Put differently, where is all this money going to come from?"

reply to post by leo123
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China has chosen to put its' money into short-term US Treasury Bonds rather than the usual long-term ones and perhaps other large foreign investors are doing the same, worried about the intrinsic devaluing of the USD, from all the debt. In other words they want to get their money back before it is devalued by inflation.

The falling Bond market leads to higher yields and this in turn will force the Federal Reserve to raise interest rates. Despite the fact the media constantly says that the Fed sets the interest rates, it is the Bond market that does this.

This could lead to a Bond Market collapse, the same as happened in 1931 which is what really led the world into financial catastrophe. If this happens then the banks will lend nothing and take everything that has any debt attached.

The real question is:- Was this the intent in the first place?????????????????

There really are no accidents when it comes to those who control from the shadows and whose family lines have done so for some thousands of years. When 20% of the world population wakes up to this, then all will awaken and we shall be free. We do not need to live in a world of perceived lack, because in fact there is potential for plenty for all.

[edit on 25-5-2009 by Nineteen]

the bond market really does set the fed interest rates....the fed just follows the 3 month Yield.....kind a funny

and ya the global bond markets are much larger than the stock markets

now with co-ordination from the white house and their media shills they can do selective reporting and make certain statements to create a severe down draft in equity's to drive money into bonds.....but long bonds??? maybe...

but seriously ....so the yield has risen....and is in the 4's (4.39)....big whoop seriously.....all this difficulty financing may just bring long bond yields up to say 5 percent or so...(as the fed buys mo' and mo') .......... but i Do NOT thing the bond market smells inflation.....just that they want a higher return for a currency with less value going forward.....but IMO this less value will just take a bit of the edge of deflationary forces....nothing for inflationista's to start peeing their pants about

there would be a intervention LONG before hyperinflation of a world reserve currency ever set in

P.S cause this doesn't get much play..........to date most of the pain in banking has been the 5-10 largest banks that have about 40% of total deposits..CITI..BOA...Well's etc.....(and the small and mid size banks had been holding up nicely).........watch how the current shhhh....Commerical real estate collapse thrashes these smaller banks (that lot's of consumer's depend on for credit) .........more pain com'n for Main street .......perhaps a consolidation of power as well


[edit on 25-5-2009 by cpdaman]

The Fed sets the Fed Funds Rate (overnight rate) , and controls this "target rate" via open market operations ....while the bond market is said to control the term structure/yield curve. Imo , to state that the bond market sets interest rates [independent of the Fed] is kind of a misnomer...simply , the bond market is constantly reacting to Fed policy at the short end. Thus the power of the Fed to influence interest rates across the curve.

What drives bond yields?

Primarily , perceived interest rate risk (volatility) - credit risk (confidence , or lack thereof in sovereign monetary - fiscal stewardship) , and , inflationary expectations.

But the underlying driver is always; Federal Reserve policy response to current economic conditions.

Easing? - tightening? - monetizing? - over-issuing?


Bond Market Close - May 26, 2009


GL

Originally posted by OBE1
The Fed sets the Fed Funds Rate (overnight rate) , and controls this "target rate" via open market operations ....while the bond market is said to control the term structure/yield curve. Imo , to state that the bond market sets interest rates [independent of the Fed] is kind of a misnomer...simply , the bond market is constantly reacting to Fed policy at the short end. Thus the power of the Fed to influence interest rates across the curve.

The fed "sets" the Fed funds rate to whatever the bond market tell's them to.....the fed sets the rate to where the 3 month t bill yield is heading ........they sometimes "jawbone" to influence the bond market or even buy or sell treasury to change the money supply ........but the bond market is their master......and when the banks aren't lending and the money multiplier is falling ....it doesn't really matter how many treasury's the fed buys....all it does is increase the POTENTIAL for inflation (should banks 1. be healthy enough to lend it out! 2. find enough willing and credit worthy borrowers!).....

i.e should the fed meet on jan 1 and cut the "fed funds rate" to 3.5 from 4 %.........only to see that by jan 15'th the yield on the three month T-bill fell to 2.6% guess what.........the fed will be cutting when they meet next....right down to 2.75% or so..........the fed is not as powerful as people think in terms of controlling the market...at least that is my opinion

also another thing the fed LOVES to do is manage INflation expectations.....it would appear they have PTSD over the deflation of the 1930's...........and all the economists who parrot inflation talk in the midst of the greatest deleveraging of a credit boom in history are given front page visibility to shape the opinions of the consumers into SPENDING instead of doing the "unthinkable" ...waiting for lower prices....


[edit on 27-5-2009 by cpdaman]