Falling Bonds, Rising Yields

Bond prices in the US, Europe and Japan have been sliding since December. At 4.11%, European 10-year government bond yields are at the highest level since  7/6/06, while at 4.88%, US bond yields are at their highest level since 8/15/06.


Graphic courtesy of Michael Panzner

From the Fed’s perspective, while falling energy prices have acted as the equivalent of rate cuts, rising yields are moving to cancel those out.

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  1. Bluzer commented on Jan 26

    This, I suspect, is the biggest story out there – and its slipping in under the radar.
    If the yield rise keeps up for a couple of months longer we could be in for some fun times – particularly with the now almost comatose housing market.

    What, and who, is causing this? Is it central banks rotating out of the dollar? Or is the concern over the debt finally translating into action? Or the developing nations deciding that their reserves could be more effectively, and constructively, deployed at home? Discern this flow and you’ll have the keys to the kingdom.

  2. Emmanuel commented on Jan 26

    On to 5% and beyond, baby! It’s been a long time since I rock and rolled.

  3. Turbo commented on Jan 26

    With fed funds at 5.25%, the 10yr can only stay down around 4.5% if the economic data stays poor and the market expects the Fed to start cutting rates this year. The data has been very Goldilocks-like, so the market is repricing for a Fed on hold for the foreseeable future. I suspect the economy will start to show the stain of what amounts to a 50bp hike in rates by the spring, and Goldilocks will meet the bears afterall…

  4. lewis commented on Jan 26

    According to what I read, the latest uptick was due this week to word that the Arabs have become net sellers of Treasuries the last two months, and have tilted the bond supply-demand accordingly.

    Long term the chart that scared me was on econobrower
    Chart 2, showing the federal foreign interest payments gradually growing over time to 75 billion a year in 2004, then shooting up to 150 billion a year in 2006. I don’t have to project the recent trend on that out too far before the dollar goes kerplunck and inflation rules the country again.

    I guess financing all that crap at walmart all these past few years will finally catch up with us. Printing up 150 billion every year just to pay for past debt while we pile on more, as Jack Nickelson would say “Something has to give”


  5. Charles Butler commented on Jan 26

    Well, the runup in bond prices from July to December indicates that folks might have gotten a little excited about the wonder of it all. The Thanksgiving warning shot across the bow of the dollar took care of that euphoria, however.


  6. VennData commented on Jan 26

    Like a CNBC reporter always ‘catching up’ with some Davos poobah, long rates are catching up with short rates (and in a hushed manner of one of those outdoor interviews, too)

    It’s not diversification away from the dollar since the Euro, UK and to a lesser extent, yen rates are doing the same.

    It could be (dis) inflation leading the way. Not the CPI type that really matters so little, cuz the little people don’t matter – just ask Kudlow. …but asset inflation… of the negative kind.

    If some sort of liquidity thing has been driving asset prices post 9/11… then the providers of that liquidity will have too eventually start removing it, be they US, Japanese, or Saudi central banks. and slowly… Slowly, which is what Greenspan taught us, and we re-learned when the Japanese pulled back too hard last Spring. ever so slowly.

    It would also explain the dollar’s confounded strength, and Oils ‘irrational’ non-zuberance (and other commodities save nickle and corn.)

    Anyway, this scenario calls for investing in anything that hasn’t gone up in the last five years. Simple really.

  7. yc32 commented on Jan 26

    It could be that economy has been stronger than anyone expected (including me), even with the housing slowdown.

  8. Fred commented on Jan 26

    Watch the 2 / 10 spread…it has narrowd by > 5 basis points this week. The curve is steepening. The Fed is out of the equation, imho.

    What happened to all the recession talk?

  9. sam commented on Jan 26

    barry, what is your opinion about shorting EEM..my take is EEM plunges before QQQQ.

  10. sam commented on Jan 26

    venndata: and that is dollar cash.

  11. Macro Man commented on Jan 26


    It will come back. Bonds at 4.5% and 2s-10s 25 bps inverted meant that the recession is already here. OK, that didn’t work. So….

    Bonds at 5% will be the knockout punch that housing, oil, and, er, bonds at 5.25% last spring failed to deliver.

    Remember, the first rule of successful economic punditry in the 21st century is: when the facts that support your conclusion change…find a new set of facts.

  12. metroplexual commented on Jan 26

    So what does this mean for the average Jane or Joe with savings? Are cd rates going to go up at banks?

  13. super-anon commented on Jan 26

    What happened to all the recession talk?

    Recession is still very much a possiblity. Superficially housing may look like it’s improving, but if you look just a bit deeper you see that the foundation of the housing market – the lending industry – is in big trouble. Foreclosures and NODs are increasing at an unprecedented rate.

    Again, no recovery will occur in housing while foreclosures are skyrocketing and lenders are going out of business.

    “As goes housing, so goes the economy.”

    No reason to assume it’s different this time until we have evidence to the contrary.

    Why not play it safe with so much uncertainty out there?

  14. Cherry commented on Jan 26

    Sorry Macro, but you didn’t see the rate of decline in RE is the summer………..WOW. It was moving down pretty fast for its industry segment.

  15. VT commented on Jan 26


    you illiterate Troll …. go somewhere else

  16. MDDWave commented on Jan 26

    On the 10 year treasury rate, if one takes the ratio of peak around May 2006 (5.1) and the low valley around December 2006 (4.5), one gets 1.13 (or roughly 13% gain).

    On the DJIA, if one takes the same time periods for the 10 year treasury rate (11600, 12500), one gets the peak around May 2006(11600) (or roughly 8 % gain.)

    Are investors just chasing a slightly better yield in stock market?

  17. Cherry commented on Jan 26

    Hey, VT, jealous I got more inside info than you do? Sure you do.

    The lack of understanding a RE bust, is quite amazing.

    Point 1: If the summer decline in RE had continued to move down, we would be talking about recession right now. So why did it stop at that speed? Great question. Nobody knows that real answer. The stupidity of the Bond rally was one factor and surprisingly led to lower mortgages when they were expected to be topping 7% by now. We still have some work raising yields though this week was a good push back to the 5-55 levels we should be at. Possible builder ‘rush’ to complete the last round of high starts with the warm weather(take a look where the “intial” claims to higher new home sales took place lol) since November may have helped make numbers look a little better. Slow to adjust government numbers make the numbers look intially like a “recovery” when they are just infact, stagnation.

    The key is, when does the next “down phase” begin? Bond yields rising may help that. But layoffs will begin hitting the economy(and looking at the 2nd half of January, that may have begun) that are long overdue from the construction and mortgage(I saw one slam into the street lol) industries that will be like a ugly leak the next few months much like the dot.coms exploding in the winter and spring of 2001.

    You can’t really say there is a bust to the bust shows itself on the street(My cousin getting layed off(this week was his last with the resort) is the first time I heard somebody from my family groan at the poor conditions in Florida. If you keep producing at “above normal” levels though demand is below them, your company will not last. The cuts must be made and they will effect the economy slowly. They did in 2001 and it wasn’t to late in the Summer that the recession really dumped some capacity.

    The slow nature of RE is what causes these outbursts as people look for quick falls to justify their beliefs one way or another. That is not how it works. It may be another part of the economy that tanks causing RE to tank as well. You just never know.

    Maybe these last 2 weeks in January are the beginning of a faster downleg like in the summer…….or maybe not.


  18. Macro Man commented on Jan 26

    Or, maybe America isn’t actually different from anywhere else in world, and a decline in housing construction and turnover is not a sufficient condition for recession, just as it wasn’t for the UK, Australia, or New Zealand over the past several years.

  19. GRL commented on Jan 26

    you see that the foundation of the housing market – the lending industry – is in big trouble

    Actually, if long rates keep going up and the fed keeps fed funds at 5.25, eventually that should cause the yield curve to un-invert, which should help the lending industry.

    A report indicated that BofA may partner, and eventually buy out CFC. If mortgage lenders are in such trouble, why is BofA getting ready to buy out the largest one?

  20. Teddy commented on Jan 26

    IMHO, not only the US, but the whole world is in a state of stagflation including Japan caused by a shortage of worldwide savings. With oil reversing recently, with a shortage of grains in our bins, with a great amount of damage to fruits and vegetables in California, with inflation accelerating in China, with worldwide money supply growth very high, and with the US experiencing for 2006 its lowest productivity reading in the last 10 years, this gives us cause to pause to ponder what’s going on.

  21. Mark commented on Jan 26

    “On the 10 year treasury rate, if one takes the ratio of peak around May 2006 (5.1) and the low valley around December 2006 (4.5), one gets 1.13 (or roughly 13% gain).”

    that’s incorrect. the return on the 10 yr given your numbers would be:
    =6%+coupon interest, so roughly 8%

  22. ac commented on Jan 26

    “Peak Liquidity Occurred in December 2006”

    The Federal Reserve controls the short end of liquidity: they didn’t tighten liquidity, the charts show that the Federal Reserve stopped raising interest rates

    The Bond Market controls the long end of liquidity: and the futures pit called interest rates higher independent of Federal Reserve action beginning in December 2006 thereby shrinking liquidity.

    Charts evidence a peaking of liquidity in December 2006
    As the bond market was tightening liquidity, most all global liqidity flowed into stocks as is seen in the chart of the S&P relative to bonds.

    Yes, most all liquidity was directed to stocks rather than toward investment in commodities like oil.

    December saw a rising of the “bellweather 10 year US Treasury Bond interest rate” upon which home loans are based: this means there will be decreased liquidity for mortgages.

    Interest rate sensitive investments have peaked out.

    Complete bond market failure occurred on December 27, 2006 as the ETF TLT fell through support: the bond market is no longer able to supply fresh liquidity.

    Final evidence for peak liquidity comes from the fact that the yield curve has been correcting since late Novemeber.”

  23. Teddy commented on Jan 27

    ac, if peak liquidity has occurred, I would expect a severe correction in stocks, or commodities, or a crash in housing. The thing that bothers me is that the money supply in the US continues to grow at double digit levels. IMHO, for the Reverse Robin Hoods to thrive, they really do need a soft landing and attempts to do so in this environment will lead to higher inflation, truly no Goldilocks environment and bad for their bond portfolios.

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