Treasury yields may not be the most interesting subject on the planet, but they are critically important. As you saw the last week, they are also closely connected with Federal Reserve interest rate decisions.
When the Fed did not show any apparent intent to change its course on the planned additional upcoming interest rate hikes (even with upheaval and volatility in the global equities and bond markets), this caused the Two Year Treasury yields to spike to their greatest level dating back to June of 2008. That is the same mid-2008 when the Global Financial Crisis and Great Recession were rapidly unfolding. It is an ominous warning, and one that you can not take lightly.
This latest run in the critical government Treasury yields started when the Fed Open Market Committee chose to unanimously maintain their key federal funds rate within the band of from two to two and a quarter percent. Markets saw this much coming, yet they also nervously anticipate that the American central bank will raise interest rates by another quarter point at the December end of 2018 meeting.
The Fed kept their accompanying policy statement identical to the previous one. Yet the market ran up the interest rates on Two Year Treasuries in particular anyway.
Granted Jerome Powell and company at the Fed are valiantly trying to stop the American economy from “overheating.”¬† Yet what they are also doing is massively increasing the costs on financing future debt and existing debts which will have to be rolled forward by corporate America and the federal government. At one point, the Ten Year Treasury benchmark notes jumped to 3.239 percent, and the Two Year Treasuries kept their ten year high of 2.973 percent.
A Wells Fargo Strategist Schumacher expressed his opinion regarding the Fed ignoring the market volatility:
“If you think back to the beginning of the year, the Fed wasn’t concerned about a 10 percent drop in two weeks…”
In other words, it will take some serious economic turmoil to derail Jerome Powell and his Federal Reserve from their intended course of continuing interest rate increases. Meanwhile, this chart shows how the 10 Year Treasury yield continues its steady march higher:
There are a number of consequences for these ratcheting higher Treasury yields that will cause real economic consequences and pain for the country. Mortgage rates famously follow 10 Year Treasury yields. This is why 30 year fixed rate mortgages have climbed to 4.15 percent from 4.04 percent at the conclusion of 2017. It explains why long-booming housing prices are beginning to reverse their course.
There are other dark sides to the tightening policies of the American central bank. Since bond prices fall when their yields rise, and there are now more Treasuries in the bond markets than ever, it is becoming a vicious cycle. The serious and troubling question remains: Who will purchase the massive quantities of U.S. federal debt?
For 2018, Treasury intends to finish auctioning $1.4 trillion in new debt. They freely admit that the rate of their borrowing is only going to increase in the coming few years. Yet all three of the largest buyers of American government bonds are not buying.
The Chinese and Japanese are the biggest foreign buyers of these bonds by far. Each of the two countries are now net sellers of the federal government’s debt. With the Federal Reserve reversing its long-time quantitative easing in a tightening maneuver, they are also dropping bonds from their bloated balance sheet of around¬ $4 trillion.
It explains how there is now a Treasury market glut as the big three customers are sidelined or actually selling their federal government bond holdings now. This means that interest rates will have to continue rising in order to attract Treasuries’ buyers. With the economy founded on a towering mountain of debt, it is an ominous sign and a clear warning bell for anyone who is objectively listening.
Is Your Retirement Portfolio Prepared for the Relentless March Higher of U.S. Treasuries’ Yields?
The U.S. federal government is going to pay an increasingly large share of its available budget on servicing the now over¬ $21 trillion in racked up debt ironically because of these self-inflicted wounds of raising their own interest rates. Within the next five to ten years, this debt service interest will equal all of the non-discretionary budget spending. This is why you must invest in some gold for your retirement portfolio. The yellow metal is unique with its thousands of years of history as the ultimate safe haven asset that investors and individuals turn to in times of geopolitical trouble and economic chaos.
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