30 Year Bond Tumbles on Bernanke Comment (Chart)

By Bob DeMarco
All American Investor

The 30 Year Bond tumbled 3 points on disappointing comments by Federal Reserve Chairman Ben Bernanke.

It appears that no new bond buying by the U.S. central bank is imminent and this triggering the biggest sell-off in three months.

Interest Rates at minus 5 Percent? (Charts)

There is an interesting article on the Financial Times pages that alludes to an internal FED analysis that the optimum interest rate right now would be -5%.

The ideal interest rate for the US economy in current conditions would be minus 5 per cent, according to internal analysis prepared for the Federal Reserve’s last policy meeting.

The analysis was based on a so-called Taylor-rule approach that estimates an appropriate interest rate based on unemployment and inflation.

Later in the article there is a short discussion of the FEDs massive expansion of bank reserves that is designed to keep rates near zero (see Reserve Bank Credit Soaring Again (Graph))

The FED has once again started buying Treasuries to keep rates down. Is it working? Just this weekend I published two charts that showed that ten year government and thirty year government bond interest rates are creeping up. See: 10 Year Treasury Closes above 3 Percent (Graph) and 30 Year Goverment Bond Signaling Problems Ahead (Chart).

All of this is worrisome and it should have holders of stocks paying attention.

Fed study puts ideal US interest rate at -5%

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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30 Year Conventional Mortgage (Update, Graph)

A slight up tick in mortgage rates. Not much going on at the moment.


Average Contract Rate on Commitments for Fixed-Rate First Mortgages.

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Ten Year Treasury Rates Bottoming (Chart)

Ten year interest rates are in the process of bottoming as evidenced by this chart. There is a continued artificial cap at 3 percent. Once this cap is broken a long term rise in interest rates will be underway.

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Why We're Not at the Beginning of the End, and Probably Not Even At the End of the Beginning

Robert Reich has an interesting post over on his blog.

But we're not at the beginning of the end. I'm not even sure we're at the end of the beginning. All of these pieces of upbeat news are connected by one fact: the flood of money the Fed has been releasing into the economy. Of course mortage rates are declining, mortgage orginations are surging, and people and companies are borrowing more. So much money is sloshing around the economy that its price is bound to drop. And cheap money is bound to induce some borrowing. The real question is whether this means an economic turnaround. The answer is it doesn't.

Read on, Why We're Not at the Beginning of the End, and Probably Not Even At the End of the Beginning

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Will the Fed Try to 'Rig' the Long Term Treasury Market?

It appears that Fed policy makers are exploring the purchase of longer-dated Treasury securities in an effort to push up their price and bring down their yield. This reminded me immediately of the Treasuries effort to manipulate the price of gold in the late 1970s. In an attempt to do this, the Treasury started periodic sales of gold. As I recall, they started selling gold into the market around $175 an ounce. They finally gave up when gold reached well into the $400s. They sold not a single ounce as gold soared up and over $800. My point here is simple--you cannot 'rig' the markets no matter how hard you try. Eventually the rubber band breaks and most times the resulting equal and opposite reaction is chaos.

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My guess is that the only thing the Fed will accomplish is to bring wild and crazy swings into the Treasury market. In other words, volatility. In the late 1970s and early 80s it was not unusual to see the long bonds move 2 or more points in a day. The daily trading ranges often exceeded 3 points. Around the same time it was not unusual to see short term rates, treasury bills, move in trading ranges greater than one percent a week. So far interest rates have been relatively tame.

It seems that nothing much changes. The "new new" thing here is to use taxpayer money or federal balance sheet leverage to cure the "sick patient". Will this work, I doubt it. My guess is we take our medicine and eventually things smooth out and then we get on a rehab program. All of this takes time. There are no overnight solutions. You can take your three antibiotic pills a day for ten days and soon enough you will be feeling better. But guess what, if you take all 30 in a single day they won't work and worse, you'll suffer from a very nasty and negative reaction.

It should be apparent that Federal regulators are running out of bullets. My suggestion is we get these guys into the Economics 101 course to revisit the laws of supply and demand. In my opinion, understanding the supply/demand equation is the real long term answer to our current economic woes.

Bernanke Risks ‘Very Unstable’ Market as He Weighs Buying Bonds

Fed Officials Worry Inflation Rates Could Ease Too Much

Key words: Fed’s efforts to purchase debt--Fed’s efforts to purchase debt.

clipped from blogs.wsj.com Federal Reserve officials at the annual meeting of the American Economic Association indicated they are growing more worried that inflation rates could get too low. With gasoline prices tumbling, the year-to-year change in the consumer price index is likely to tip into negative territory in the months ahead. Meantime, increases in core consumer prices, which exclude food and energy, have slowed sharply in recent months. Fed officials don’t foresee deflation happening, but they’d like to avoid even getting close to it. “It is especially important in such circumstances for the Fed to emphasize its commitment to returning inflation over time to the higher levels that are most appropriate to the attainment of its longer-term objectives,” Ms. Yellen said. The Fed’s balance sheet has ballooned from less than $900 billion to more than $2 trillion since September Fed’s efforts to purchase debt “have only just begun.”