[Toshi]

Bond market calls Fed's bluff as global economy falls apart
Global bond markets are calling the bluff of the US Federal Reserve.

By Ambrose Evans-Pritchard
Last Updated: 7:22PM GMT 08 Feb 2009

The yield on 10-year US Treasury bonds – the world's benchmark cost of capital – has jumped from 2pc to 3pc since Christmas despite efforts to talk the rate down.

This level will asphyxiate the US economy if allowed to persist, as Fed chair Ben Bernanke must know. The US is already in deflation. Core prices – stripping out energy – fell at an annual rate of 2pc in the fourth quarter. Wages are following. IBM, Chrysler, General Motors, and YRC, have all begun to cut pay.

The "real" cost of capital is rising as the slump deepens. This is textbook debt deflation. It was not supposed to happen. The Bernanke doctrine assumes that the Fed can bring down the whole structure of interest costs, first by slashing the Fed Funds rate to zero, and then by making a "credible threat" to buy Treasuries outright with printed money.

Mr Bernanke has been repeating this threat since early December. But talk is cheap. As the Fed hesitates, real yields climb ever higher. Plainly, the markets do not regard Fed rhetoric as "credible" at all.

Who can blame bond vigilantes for going on strike? Nobody wants to be left holding the bag if and when the global monetary blitz succeeds in stoking inflation. Governments are borrowing frantically to fund their bail-outs and cover a collapse in tax revenue. The US Treasury alone needs to raise $2 trillion in 2009.

Where is the money to come from? China, the Pacific tigers and the commodity powers are no longer amassing foreign reserves ($7.6 trillion). Their exports have collapsed. Instead of buying a trillion dollars of extra bonds each year, they have become net sellers. In aggregate, they dumped $190bn over the last fifteen weeks.

The Fed has stepped into the breach, up to a point. It has bought $350bn of commercial paper, and begun to buy $600bn of mortgage bonds. That helps. But still it recoils from buying Treasuries, perhaps fearing that any move to "monetise" Washington's deficit starts a slippery slope towards an Argentine fate. Or perhaps Bernanke doesn't believe his own assurances that the Fed can extract itself easily from emergency policies when the cycle turns.

As they dither, the world is falling apart. [...]

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4560901/Bond-market-calls-Feds-bluff-as-world-falls-apart.html

and that bond data that he refers to: http://www.bloomberg.com/apps/news?pid=20602007&sid=a6dvaVgQp8d8&refer=govt_bonds

The 10-year note’s yield fell three basis points to 2.97 percent as of 12:43 p.m. in Tokyo, according to BGCantor Market Data. The price of the 3.75 percent security due in November 2018 rose 7/32, or $2.19 per $1,000 face amount, to 106 19/32. The yield touched 3 percent on Feb. 6, a level not seen since Nov. 28.

Ten-year yields, which slid to a record low of 2.04 percent on Dec. 18, have averaged 4.55 percent this decade.

is the original article's author correct, and is the world (china) tired of buying american treasuries, thus increasing our cost of borrowing at a time of unprecedented borrowing for war and stimulus? well, we'll find out soon...

The U.S. plans to sell $32 billion of three-year notes tomorrow, $21 billion of 10-year securities on Feb. 11 and $14 billion of 30- year bonds Feb. 12.

 

[Toshi]

hmm. 10 year bond yield is at 2.83 today, so the market at large still is buying them eagerly, at least at this point.

 

[dante]

hmm. 10 year bond yield is at 2.83 today, so the market at large still is buying them eagerly, at least at this point.

Yup. I'd be annoyed at my TBT holdings are down 4.7%, except the rest of the market is down... 4.7%.

[facepalm]