Update: yesterday it was the 5 year, today the 7. In both cases yields on Treasury Notes have risen, with the 30 year seen in the 4.75% neighborhood. Much angst in the blogosphere. With the Fed keeping the short end pinned near zero, and swearing that they aren’t letting up any time soon, how steep can the yield curve get?
The dollar moved up, commodities and bonds fell together? Hmm… There was some suggestion of a buyer’s strike by the increasingly unhappy sounding Chinese. Others think this may have been precipitated by the very strange occurrence of a negative swap spread (a 10 year rate swap yielding less than a 10 year Treasury), and the necessary unwinding of positions around that spread. All of this strikes me as a little bit fishy, aside from the question of what a negative spread does to all the financial formulas based on a “risk free” rate.
We have to ask again, if yields are going to rise, what is the reason? Bonds basically get re-priced for one of two reasons, or maybe both: the markets fear loss of buying power (inflation risk), or loss of principal (default risk). In the case of US Treasuries, how real is either of these, today? It may cost me, but I ain’t buying it. Not yet, anyway.