I wasn't expecting the bond market to have serious trouble until there was real signs of inflation.
Right now the economy seems to still be in a deflationary cycle, as consumers continue to conserve their money by not spending unnecessarily, due to their fear about the shaky Financial, Auto, and Mortgage sectors of the economy. As consumers spend less, business sell less requiring them to cut production and labor. This creates a kind of deflationary spiral eating away at capital as the economy spirals downward. A stimulus packages is designed to get businesses and consumers spending again. The danger of a stimulus package is it can cause inflation, as money previously horded is released back into the economy to satisfy consumer's pent_up demands. Prices can really go through the roof when selves begin to empty. The economy normalizes again when business once again start operating at levels sufficient to meet consumer demands for goods and services. What seems to be happening in the treasury bond market right now is rates of return , (eg yields), on bonds are increasing dramatically, as US Treasury Bonds sell for less and less under face value at action. For example, imagine a $10,000.00 bond that pays 5% interest annually or $500.00 each year. Now, imagine a public that anticipates an average inflation rate over the next 5 to 10 years of 10% annually. In order to cover the the expected 10% annual inflation rate, the purchaser of debt obligations would need at a minimum a 10% rate of return on USA Treasury Bonds. A bond purchaser could get the 10% annual yield on a $10,000.00 bond that paid 5% interest annually by purchasing the USA Treasury Bond for $5,000.00 at public auction, (Cost of $10,000.00 USA Treasury bond of $5,000.00 that pays $500.00 each year. This would mean people that previously paid face value for a $10,000.00, 5% bond would be carrying an unrealized loss on their book of $5,000.00. So, as the yield on the bonds increases during the USA Treasury Bond Auction, anyone that has previously purchased a bond for an amount that results in lesser yields will be trying to dump their bonds as fast as possible; before, their bond decline in value further. This resulted in a sell off in bond that had a ripple effect on the trading value and interest rates in the mortgage markets. I think most of what is going on right now is psychological; because, I haven't seen any report coming down the pike indicating that inflation has started raising its ugly head. Pete was right about gold doing well during inflationary periods, relative to other investments like stocks and bonds that tend to suffer more, due to loss in purchasing power when liquidated or worthlessness. Theoretically, gold will not produce any real gains or losses during times of inflation, but gold tends to be a good store of value. In other words gold will increase in value during inflationary periods holding its good and services purchasing power. The last I heard, they are not making anymore land, so it too is a good store of value. http://en.wikipedia.org/wiki/Store_of_value Regards, LelandJ Bob Calco wrote: > http://www.cnbc.com/id/30968861 > > New Investor Worry: Treasury Selloff Spiking Interest Rates > > - - - > A selling spree in Treasuries pushed rates higher, taking the yield curve to > its steepest on record as spreads between the 2-year and 10-year widened by > over a dozen basis points on Wednesday alone. > > The 10-year saw its yield move above 3.70 percent, after trading at 3.55 > percent the previous day. The selling wave hit bonds shortly after 1 p.m., > even after the auction of $35 billion in 5-year notes was well received. > - - - > > bbbrrrbbbrrmmmm... > > Don't worry, that low, barely perceptible sound you heard below deck was no > big deal, just a small iceberg. > > - Bob > > [excessive quoting removed by server] _______________________________________________ Post Messages to: [email protected] Subscription Maintenance: http://leafe.com/mailman/listinfo/profox OT-free version of this list: http://leafe.com/mailman/listinfo/profoxtech Searchable Archive: http://leafe.com/archives/search/profox This message: http://leafe.com/archives/byMID/profox/[email protected] ** All postings, unless explicitly stated otherwise, are the opinions of the author, and do not constitute legal or medical advice. This statement is added to the messages for those lawyers who are too stupid to see the obvious.
