Sunday, January 16, 2011

Meanwhile, interest rates

Interest rates have been rising across the board lately. Short term as well as long term. The recent sudden rise in long term rates coincided with the U.S. Federal Reserve buying of long term U.S. Govt bonds. A move that was supposed to keep U.S. Govt borrowing costs down. Or so they said. However, if I was a MAJOR holder of long term USG debt, I would have considered it a excellent chance to unwind a large position. And that is what I think is happening. After all, what was supposed to happen to interest rates when the Fed stopped buying?
Some attribute the rise in rates to expectations of an improving economy. I suppose they are right. Some call the rise in rates an expectation for higher inflation. Same thing. And some call the rise in rates a decline in the willingness of bond holders to hold U.S. Govt debt for such low yields.(inflation?) Some cite the impending downgrade of U.S. Govt debt by the major ratings agencys.
A downgrade of a debt issuer implies doubt about the issuers ability to repay.What!!!??

Whatever the reason, interest rates are going up. Not a good thing for a debt-based economy that depends on asset values to sustain itself.
Not a good thing for a government deep in debt, whose debt maturity is 4-5 years in duration. ie, the huge borrowing over the last couple of years will come due in 2-3 years. More borrowing.
Not a good thing for taxpayers who don't want to pay taxes, but want their money to retain it's value.
Not a good thing for a stock market that looks ahead to the future.

But, meanwhile, back at the ranch:

Here is a chart of the Lehman 20yr Short ETF. It goes up when 20yr treasury yields go up. It is a good looking chart. A break above 40 could be the start of a sharp sustained move.

Here is the TLT, an ETF of the 20yr govt bond. Going down. It is either a bottom or a floor. If the floor gives way, down it goes.

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