Will long treasury rates be 10% soon?

[grapejelly]

The mechanism is already in place. More countries are raising their interest rates in order to try to attract capital from fleeing.

I think long treasurys will eventually fall for two reasons. One, is that capital grows more and more scared and loaning money out for a longer period of time is scarier and deserves a higher return.

Two, of course, is the huge supply that is being dumped onto the market. At some point it overwhelms demand.


http://www.prudentbear.com/index.php...y?art_id=10141

[quote]
Reflecting very "easy" credit that is integral to every great bubble, real long interest rates have declined until speculation fails. As shown on the following page of charts, some of the declines have been huge.


Soaring real rates is one of the features of a post-bubble contraction, and is accomplished by falling prices and earnings power that impairs the ability to service debt.


A revulsion for most corporate debt soon encompasses long-dated treasuries such that nominal yields increase as the rate of CPI inflation declines.


In each case, the shock to the markets and policy makers was sufficient to end a generation's abuse of credit.

[grapejelly]

Re: Will long treasury rates be 10% soon?

nobody commenting? This is a major bit of analysis. Picture what it will do to the world when rates are this high on the long side.

It could happen sooner than anyone thinks.

[*T*]

Re: Will long treasury rates be 10% soon?

nobody commenting? This is a major bit of analysis. Picture what it will do to the world when rates are this high on the long side.

It could happen sooner than anyone thinks.

I totally agree and think it is already starting. That is why I had not commented.

[c1ue]

Re: Will long treasury rates be 10% soon?

GJ,

The iTulip thesis would seem to have long maintained that the ultimate result will be inflation and/or high interest rates.

The examples posted are interesting, but don't seem to change this thesis.

Furthermore another wrinkle is the fiat reserve US$; in all 3 other examples, the US$ was not of that status.

But in general I view this situation much like analyzing behavior of gases using Boyle's law: PV=nRT

We know what nRT is, now we're waiting to see how Pressure (interest rates) and Volume (inflation) react.

[pinhead]

Re: Boyle's Law Analogy

I like that, as an engineer, that feels like it fits somehow.
I need to think about the analogy a little more to see if I can use it to interpret economics.

Can you clarify your thoughts on nRT?

[phirang]

Re: Boyle's Law Analogy

I like that, as an engineer, that feels like it fits somehow.
I need to think about the analogy a little more to see if I can use it to interpret economics.

Can you clarify your thoughts on nRT?

Econ is all systems engineering: epsilons and deltas.

... but not strictly euclidean metrics! Topology is used, too!

[c1ue]

Re: Will long treasury rates be 10% soon?

nRT in this case is the aggregate of cash*cash velocity + credit*credit velocity.

n = financial constant, T = velocity, R = amount.

So perhaps it really should be: Interest rates * Inflation = n * ((Tcash * Rcash)+(Tcredit*Rcredit))

This isn't a serious economic equation though - merely my mental construct.

[ThePythonicCow]

Re: Will long treasury rates be 10% soon?

It could happen sooner than anyone thinks.

I don't think it (doubling of Treasury rates) will happen so quickly.

Now that the burden of paying Treasury dividends is quickly becoming a significant portion of the tax burden on U.S. taxpayers, the pain of doubling that burden would be disastrous. That's why this time "is different" than the earlier times in the charts.

So I think that the question is not what happens when these rates double, but what gyrations, tyranny, lies and distortions of the market and the truth will our Central Bankers engage in first, to keep that from happening.

A cornered Fed/JPMorgan/Treasury is a dangerous beast.

[ThePythonicCow]

Re: Will long treasury rates be 10% soon?

but what gyrations, tyranny, lies and distortions

Well, to answer myself, other iTulip posts have discussed the recent proposal to force employees to invest 3% of their pay in Treasuries, instead of 401K tax breaks.

That's one, rather tyrannical, mechanism that will help depress Treasury yields for a long while into the future.

[*T*]

Re: Boyle's Law Analogy

I like that, as an engineer, that feels like it fits somehow.
I need to think about the analogy a little more to see if I can use it to interpret economics.

Can you clarify your thoughts on nRT?

You should read that paper Rajiv (or sapiens?) posted - something about economic parasitsm - anyway it went into detail about a gas law analogy & how inf/deflation extracted energy from the economy (the hysterisis problem). Very interesting as an engineer.

[Finster]

Re: Will long treasury rates be 10% soon?

I don't think it (doubling of Treasury rates) will happen so quickly.

Now that the burden of paying Treasury dividends is quickly becoming a significant portion of the tax burden on U.S. taxpayers, the pain of doubling that burden would be disastrous. That's why this time "is different" than the earlier times in the charts.

So I think that the question is not what happens when these rates double, but what gyrations, tyranny, lies and distortions of the market and the truth will our Central Bankers engage in first, to keep that from happening.

A cornered Fed/JPMorgan/Treasury is a dangerous beast.

Agreed, TPC. It will happen, but perhaps not so quickly.

One additional reason: UST can lose value in two distinct ways: 1) Via a fall in value relative to USD, i.e. a decline in price and a rise in rates, and 2) Via a fall in the value of the USD itself.

The latter of course obviates some of the burden you cite...

[ThePythonicCow]

Re: Will long treasury rates be 10% soon?

The latter [a fall in the value of the USD itself] of course obviates some of the burden you cite...

Yup, probably so, for a little while anyway, until investors grow weary of the weakening dollar trend and start to persistently push up Treasury yields in compensation. The return of the Bond Vigilantes, perhaps?

The worlds money machine seems to have departed from anything resembling a perpetually stable state, and now we're debating only the circumstances of its demise.

A solid gold convertible currency might not be the answer, but the goldbugs are at least right in observing that a Debt based paper currency isn't the answer either. The alchemists failed in creating Gold from Tin, but the modern day banker has succeeded all too well in creating Debt from Deceipt. Anytime the base for your currency, Debt in our case, can be created at will, then it will be so created, until the currency collapses.

[ThePythonicCow]

Re: Will long treasury rates be 10% soon?

Agreed, TPC. It will happen, but perhaps not so quickly.

On second thought, disagreeing with myself, there is still an ample supply of potential exogenous events that could lead to a more rapid, chaotic transition. What I am reading of the risky investments of European banks is not reassuring.

See for example http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3260052/Europe-on-the-brink-of-currency-crisis-meltdown.html

Europe on the brink of currency crisis meltdown

The crisis in Hungary recalls the heady days of the UK’s expulsion from the ERM.

By Ambrose Evans-Pritchard
Last Updated: 10:52AM GMT 26 Oct 2008

The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.

Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.

“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.

It may be that the interesting times in which we live aren't quite concluded yet. Several of the market timing newsletter services to which I subscribe had led me slightly back into the market this last week, for both gold stocks and S&P 500 correlated investments. I'm tempted to lurch back into my foxhole again ;), having earned enough to pay for another quarter's worth of those subscriptions, but little more.

[Finster]

Re: Will long treasury rates be 10% soon?

A solid gold convertible currency might not be the answer, but the goldbugs are at least right in observing that a Debt based paper currency isn't the answer either. The alchemists failed in creating Gold from Tin, but the modern day banker has succeeded all too well in creating Debt from Deceipt. Anytime the base for your currency, Debt in our case, can be created at will, then it will be so created, until the currency collapses.

Going to have to agree again, TPC. The advantage of the gold standard was that it restrained the banksters from creating too much credit. The disadvantage was that it created a false sense of security ... a government sponsored gold standard can be abrogated on a whim.

With the advance of nuclear technology, any new attempt at a gold standard would seem to risk a development few gold bugs anticipate:

The founding of a Federal Reserve Bank of Los Alamos ...

[Finster]

Re: Will long treasury rates be 10% soon?

On second thought, disagreeing with myself, there is still an ample supply of potential exogenous events that could lead to a more rapid, chaotic transition...

Here is some historical perspective to chew on. Well over a century of ten year UST yields, inverted to connote price. Note the both the longer term bouncing-ball pattern and the range of variation therewithin. And especially note the power and persistence of the larger pattern, undisturbed by war, peace, prosperity and depression.


UST History




Using that as a springboard, we can speculate as to the range of possibilites for UST prices and yields over the next couple years. First we have the bull case, then followed by the bear case. Note that in both cases, we're looking at only about a percent or two of yield movement.

Bull Scenario




Bear Scenario