USA: What government bond yields are revealing
According to yesterday's Financial Times (FT), "US 10 year Treasury yields have jumped 63 basis points to 3.83 per cent since November 30th...Analysts say that US...bond yields...could rise by a further two percentage points this year." If the FT article is remotely correct, a two percentage point lurch in bond yields would imply that they have 52% to rise this year, based on the current yield of 3.83%.
A 52% jump in yields implies that the prices of US treasury bonds have to fall starkly, given the inverse relationship between yields and prices.
The implication is that this time around, the action will be at the long end of the yield curve, the end off which long-term loans and mortgages are priced.
You do not need a PhD to figure out what a 50% jump in mortgage rates would do to consumption, do you? That would intensify the current excess supply of goods even more, leading to ever-greater earnings disappointments in the equity market.
All of which suggests that precisely because long rates will rise and thus thwart business activity, the Fed will have to keep short rates - e.g. Fed Funds - low for a long time. At the outset of this crisis we postulated that the Fed would keep rates low until 2011.
But the point of this missive - and of our more recent missives - has been to keep an eye on the long end of the yield curve.
