Interest Rates May Be Set To Rise………

Posted By on December 22, 2009

Something to watch closely…….From Art Cashin’s comments from the floor of the New York Stock Exchange……  

Things are beginning to stir in the bond market.  The deflationary shadow seems to be disappearing and rather rapidly.  Early signs of inflationary concerns are beginning to appear.  The action of the bond markets may be causing, or at least posing, problems for the Fed and the recovery.  Here is the take of the very savvy T.J. Marta in his morning comments:

The 2yr yield is higher, as we expected, but the 10yr yield is even higher. The rise in the 10yr is going to be problematic for policymakers as it will force mortgage rates higher, something the economy can ill-afford. The spread between the 30yr FNMA and the average of the 5yr and 10yr Treasury yields has plummeted 16bp in the past week to 157bp, a low since May 27, during a period when the 30yr mortgage rate spiked wider from 4.33% to 5.50% in the course of a month. With the Fed having abandoned its policy of Treasury buying and Congress hell-bent on spending the country into oblivion (we don’t believe in the accounting gimmicks of the recent and pending legislation), either one of the two needs to change course or the economic rebound is in trouble.

If the bond vigilantes press the bet in the ten year, the upward pressure on mortgages could send housing back into a spiral.  Concurrently, a spike in bond yields could bring more strength into the dollar.  Certainly something we need to watch closely.

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