Saturday, June 6, 2009

The long bond yield at pre-recession level

Something's rotten in the state of the US economy. We discussed this issue a couple of weeks ago. We are still amidst a massive recession, yet the long bond yield is now back at pre-recession levels. In fact the 30-year yield is above the beginning of 2006 level. Hard to believe, but here it is:

So what does this mean you may ask? Who cares? If the rates are moving into pre-recession levels now, what will happen when we come out of this recession?

Here is a quote from a Reuters story that touches on the topic.
"Fed Chairman Ben Bernanke on Wednesday said worries about skyrocketing U.S. government debt appeared to be a factor behind the rise in long-term rates and he said getting budget deficits under control was an economic necessity.

In an interview with The Economist magazine, New York Federal Reserve Bank President William Dudley also acknowledged that nervousness about budget deficits may be behind the rise in yields, but he said there is little to evidence a dangerous jump in inflation is on the horizon."
"Skyrocketing U.S. government debt appeared to be a factor"? Mr. Bernanke what world do you live in? With the credit markets opening up the markets are now absorbing not only this massive new supply of government paper, but also all the new corporate debt (see as an example $4 Billion of new Verizon Wireless debt.) Something's got to give. Unless the Fed buys more long-term treasuries to bring the yields down (which just delays and exacerbates the problem), we are looking at the world of high interest rates.

The danger is that we may be going back to the economy of the 70s - the era of stagnating growth, high unemployment, rising commodity prices, and high interest rates. Add to that high taxes and huge debt levels, and the US will start looking more like a banana republic.

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