Rising Bond Yields (or, The Magazine Cover Indicator Lives!)

Chart courtesy of stockcharts.com


A few months ago, we noted (with an  "Uh-Oh") that Business Week’s February 19, 2007 cover story was on our "Low, Low, Low, Low-Rate World" (for more on the magazine cover indicator, see this).

So far, the timing is of the indicator has been rather typical: Rates ticked down, hitting their nadir (4.48%) a ~month after the cover story appeared. Its been nothing but up since then: Yield on the 10 year bond reversed course rather dramatically. From that sub 4.5% trough, the yield on the benchmark note is now at 4.94% — the high point for the year. The 10 year yield has not been over 5% since August 2006.

0708covdcHere is a quick overview as to why yields have moved up — and are likely to keep going higher:

1. Global Yields are higher:  The WSJ Marketbeat notes that there are "higher yields around the globe. Major central banks, such as the European Central Bank and the Bank of England, are in the process of adjusting their target rates higher, and that’s boosted the yields in other markets. The 10-year British gilt yielded 5.17% as of [5.22.07], while the 10-year German bund was yielding 4.36%, both highs for the year, and bonds in Canada and Australia were also at yearly highs. The U.S. long had higher yields than many other nations, which helped keep capital flocking to the country, but that advantage has faded."

2. Overseas Economies are RobustAhead of the Tape columnist Justin Lahart notes that "Overseas economies have remained strong despite the
U.S. slowdown. That has stoked inflation worries abroad, which in turn
is helping to push interest rates higher and keep pressure on central

3. Rate Cut expectations are dramatically lower: Fed Fund  futures are only forecasting a 50/50 chance of a reate cut by year’s end. As recently as  March, the Fund Futures were anticipating at least three 25 basis interest-rate cuts from the Federal Reserve.

4. Fed Fund rates could be going higher: Bloomberg noted that "Options on Federal Fund futures at the Chicago Board of
Trade indicate a 41 percent chance the central bank will lift its
target rate for overnight loans between banks to 5.5 percent from
the current 5.25 percent, according to data compiled by
Bloomberg. A month ago, they showed no expectations for an

5. Diversification Away From US Treasuries and Dollars: The Chinese are seeking ways to diversify their $1.2 trillion in foreign reserves; Middle Eastern Oil Countries are doing so also; Japan may soon follow. Most of these regions (Asia, Europe, Middle East) remain net purchasers of U.S. Treasurys, but at a somewhat slower rate. It doesn’t require heavy selling to push yields higer, merely slowing the purchases of our massive debt sends yields upwards.

6. Political Blowback: As the G8 summit takes place, we might as well admit the elephant in the room that too few people have acknowledged: The US ain’t very popular around the world these days.  Some countries have used that opening to move away from the dollar as the world’s reserve currency. Its a small smack at the US and its unpopular President. Of much greater concern than petty payback, it isn’t too hard to imagine some point in the future where Oil or even Gold is priced in Euros – THATS a situation with grave consequences. 



Five Reasons: Rising Bond Yields
David Gaffen
Marketeat May 23, 2007, 3:37 pm

Look Overseas For Why Rates In U.S. Are Up
Justin Lahart
WSJ, June 5, 2007; Page C1

Fed Faces Pressure to Raise Rates, Options Show
Daniel Kruger 
Bloomberg, June 4

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What's been said:

Discussions found on the web:
  1. will rahal commented on Jun 5

    Wall Street analysts have been rising stock ratings lately. I have found that stock ratings, clollectively, are closely associated with the direction of interest rates.

  2. DealBreaker.com commented on Jun 5

    Opening Bell: 6.5.07

    Krispy Kreme’s Loss Widens (WSJ) Krispy Kreme donuts are awesome, no doubt about it, but apparently the business model for selling them is broken. You can’t make a buck selling ’em. Although the company is trying to turn things around,…

  3. Greg0658 commented on Jun 5

    I wish we sent VP Cheney to the G8, in case there is an arrest on the agenda.

  4. jmf commented on Jun 5

    moin moin from germany,

    one of the leading german newsmags has a coverstory about “how to profit from the stockmarket”…….

    just the day the dax broke 8.000 ( ath 8163) and the mdax is making new ath and has even outperformed the dax by a wide margin…..

  5. Philippe commented on Jun 5

    The same situation occurs in Europe analysts are rising stocks ratings at a fast pace. They do not factor interest rates in their forecasts (for eg see telecom’s Italia debt as a percentage of the Italian GDP)
    Of course al the paper which has been absorbed during the distribution has to be recycled at ….a price

  6. Alex Khenkin commented on Jun 5

    Would 10-year yielding over 5% be an excellent long entry point, like it was last Summer? Methinks, I’ll wait for Yahoo!Finance to post another article on shorting bonds as a “buy” signal.

  7. Winston Munn commented on Jun 5

    “Of much greater concern than petty payback, it isn’t too hard to imagine some point in the future where Oil or even Gold is priced in Euros – THATS a situation with grave consequences.”

    U.S. reliance on the petro dollar as the world’s unit of trade is the Achille’s heel of the giant that is the U.S. economy.

    Syria, I believe, is the latest to abandon this standard.

  8. NotAPro commented on Jun 5

    I’ve read in a number of places that switching oil pricing to Euros would be very bad for the US. Some conspiracy minded people thought that was the reason the US invaded Iraq, as Saddam was interested in doing just that.

    Could someone explain in a bit more detail precisely why this would be so bad?

  9. Philippe commented on Jun 5

    It may of interest to know that in term of flows speculative funds are now NET SELLERS of the SP 500 as of may

  10. Alex Khenkin commented on Jun 5

    I’ve read in a number of places that switching oil pricing to Euros would be very bad for the US. Some conspiracy minded people thought that was the reason the US invaded Iraq, as Saddam was interested in doing just that.
    Could someone explain in a bit more detail precisely why this would be so bad?

    Nobody can explain it “in detail” because there’s nothing to explain. You can buy oil, gold, whatever, for Euros, Pounds, NZD, etc. The whole “pricing in Euros” thing is a red herring if there’s ever been one.

    By the way, isn’t it ironic that the same people who derided the Euro five short years ago (remember “Zeuro”) are now calling it the biggest threat to the US economy, or some such?

  11. michael shumacher commented on Jun 5

    the fed is toothless….it can do nothing but raise rates in the face of the data that it produces (highly suspect)and what it reacts upon.

    If it lowered rates it would be nothing nore than pandering to the very few (who are unfortunately in control).

    I asked this question several months ago when the scores of peole were pining for a rate cut:

    Why are we the only CB in the world that is even considering a rate cut in the fact of slow growth, and higher inflation??

    We know have the worst GDP in four years, housing market sick and getting sicker.

    The fed has no choice but to raise rates however the bush administration will not let them as it has too much influence on the CB with it’s goldman executives running the economy. Oh , I forgot said executive said just a week ago that the housing marklet has bottomed….does’nt sound anything like they will raise them soon with that rhetoric.


  12. UrbanDigs commented on Jun 5

    10 YR Bond yields have been making higher highs and higher lows for the past 6 weeks since the most recent bottom in mid-March at 4.5% or so.

    Back then, inflation pressures were worse than they seem today; notwithstanding the notion that inflation data is flawed as noted here on Big Picture.

    As rates trended higher, due to inflation pressures abound, to level of 4.75% or so back in late April, they needed a catalyst to make the next move.

    That came on May 17th when the Jobs data came out much better than expected and caused bond yields to surge to the next level. We are in a new trading range and I would expect a slight cooldown before the next move up.

    Why? US Economy is reported to be still strong while inflation is not moderating as fast as fed has hoped; even with the flawed data.

  13. Nova Law commented on Jun 5

    Another day, another Bush Derangement Syndrome post from Michael Schumacher. At least he didn’t use obscenities or attack any other posters this time. The day is early, however.

  14. michael shumacher commented on Jun 5

    that’s funny…..I never attack unless I am attacked by someone who is completely unaware of reality and blissfully admits it with each and every post they conjure up.

    Nogo- give it up, you are so unaware it;s not even funny any longer.

    If you can’t add to the discussion then don’t.

    I guess you have to be told that yet again

    Nice try with the bait….


  15. wunsacon commented on Jun 5

    Winston, BR, I don’t understand the connection between repricing oil in, say, Euros instead of dollars. Isn’t the important thing what the oil-seller/dollar-buyer does afterwards with its dollars? I see the pricing change as nothing more than symbolic.

    Or does the “convenience” of starting off with a different currency mark a commitment by oil sellers to recycle far less of their revenue into Treasuries?

  16. kharris commented on Jun 5

    The overall “rates headed higher” view is the right one, but the Bloomberg article may be bit naïve. The author tells us that the options market is a better indicator of Fed expectations than the futures market, and that options are giving higher odds of a hike. Except that this morning, roughly 90% of trade in the Eurodollar pit was on the other side, trading back toward no change. And the fact that options are better most of the time (whatever that means), doesn’t mean they are right all of the time. Perhaps, just perhaps, the adjustment away from the expectation of an ease led to a temporary overshoot, and in time the options market will price in something closer to what is priced in the futures market – no change in Fed rates this year.

    So flip over to the Bloomberg tool that the author used to make his grand assessment today, and what do we find? Odds of a hike, as priced in the options market, are down to 39.6% today, but that’s not the big news. Odds of an ease are priced at 27.8% while odds of no change are priced at 19.2%. So just naively employing the tool, the odds of both a hike and an ease are greater than the odds of no change. Maybe somebody is buying protection against uncertainty in the overnight market around the end of the year? Oh, but let’s look further. January options once again have 5.25% as the most likely outcome. April has either a hike or an ease as more likely than no change. From this, the author would conclude that options are pricing in higher odds of a hike in December and April, but not in January?

    Sorry, but the Bloomberg author doesn’t understand the implications of the output from his own tool.

  17. mhm commented on Jun 5


    I don’t think the Fed was seriously considering a rate cut. I was just silent on the Street hope for a rate cut.

    Even if it was considering it would not be alone. The brazilian CB is cutting rates steadily, but then it is is second highest in the world and needs to control the BRL appreciation.

  18. michael shumacher commented on Jun 5

    I did’nt say the fed was considering…I said people were pining for a rate cut. Sometimes when Wall St. says something many times it becomes part of the vernacular as if it was already going to happen.

    I love how we went from a “softening economy” straight into a rebound. WTF??? We never had any weakness?? So we go from a slow down (without any period of consolidation) to a rebound??

    Gotta love the Fed. snake oil at it’s finest.

    Maybe Hank should have a little discussion with Ben about his call on the housing bottom of last week……..since that now is exactly what it was worth..absolutley nothing more than pandering to the chinese.

    I expect Greenspan to come out any day and spoil the (fake) party for the perma-bulls.


  19. rex commented on Jun 5

    Barry: The odds of a rate cut this year aren’t 50-50. After ISM and Ben, it’s only a 16% chance of a rate cut (according to CBOT prices). Call it 50-50 (more or less) whether the next move is up or down.
    In just the last 2 days, Goldman and Merrill have both abandoned their rate cut calls. Just a few holdouts are left: UBS, most prominently.

  20. M.Z. Forrest commented on Jun 5

    Most OPEC nations require purchasers of oil to make their purchase in dollars and hence real dollars are needed to buy oil. For most importing countries, this requires some sort of reserve of US dollars. In short this allows the printing of dollars without the expectation that they will be returned. Not too long go, some OPEC nations decided they would accept Euros at the buyer’s discretion. There hasn’t been a lot of purchasing in Euros though because Greenbacks have been depreciating in value. If countries start requiring purchases be made in Euros, you will see countries with other currencies possibly dumping a significant portion of their dollar reserves on the US market and increasing their Euro reserves.

  21. Joanie commented on Jun 5

    Meanwhile, we in the US are having some serious issues with govvie levels. I see where the 10 yr. note has breached a 4.95 and stocks are tumbling right along with the latest in higher yields. I am wondering if this has anything to do with the buck’s demise which is also underway. The latest talk of the town? The Yen is absolutely in the doghouse, having hit a record low vs. the Euro. You can make a few inferences from that: 1. carry trades continue, supported by 2. wide expectations that the ECB will raise rates at its meeting tomorrow (RBA also decides tomorrow; RBNZ and BOE meet Thursday; these 3 are all expected to give a nothin’ done but should also keep tightening biases) as is evidenced by 3. Japanese money moving offshore to pick up yield … BUT THE TWIST THIS TIME is that they are not comin’ here. No sir, they look to be headin’ for Euro-denominated and other high-yielding assets. The Aussie $, a noted high yielding currency for example, hit a 6-wk. high vs. the buck overnight and a 15-yr high vs. the Yen. Ditto the Kiwi which marked a 17 yr. high vs. the Japanese currency.

    B’berg notes, too, that the spread between JGBs and bunds is at a 5-yr. high, an irresistible attraction, no doubt.

    Meanwhile the buck is the butt of all this clamoring for high yield. This is probably owing to the continued farce in which we deny having any inflationary pressures. On the strong-economy side, the spin is that NFP was robust along with ISM. At the same time, we are touting a modest +.1% increase in April’s core PCE deflator. Y/y it’s lookin’ even better: +2.0%. Thus, as far as the buck is concerned, our benign state of price stability, hallucinatory though that might be, is trumping any strong economic data. Thus the FED is viewed with little excuse to raise rates. Voila, the rate-seekers are avoiding us at the moment.

  22. Cherry commented on Jun 5

    Look for the governments “inflation” data(not the real thing as we all know lol) to begin increasing starting with the June report and the core back to 3.0% by the end of the year.

    All that liquidity flowed into industrial production which has surprised people IMO. The problem is, it is inflationary, the rest of the world already has a inflation problem. Thus rates will continue to rise and unlike the false alarm of 2006(no bust) they will continue to rise, possibly to 6% yields by Labor day and 7% yields by next year.

    Overall growth won’t be that impressive with Housing only now ending its first stage(normalization) and now starting its recessionary decline that usually lasts 22 months, but the surge in growth from that liquidity(which is drying up now, but lags) should pump growth back to the 3% range for 2008. My contact in the building industry got laid of in March. Sad day indeed. He said things have gone from Incredible to Great to Good to now Fair. Next is Below Average and then Bad then Terrible.

    You have to remember, we never have had a real housing led downturn since WWII. We don’t know what it is like. They usually went with the whims of the business sector and that was it. Now they are falling in a major global boom. That is amazing.

    Maybe not since the 20’s we have had a moment like this. Housing busted 3-4 years before the depression started and things are looking similiar right now. We will be 2 years since the bust started in Fall 2005. Sounds like another 1-2 years left before the rest follows. Global economy crests in 2008, Markets pop the same year, recession in 2009 right at the presidential cycle. About right.

  23. Eclectic commented on Jun 6

    Here’s what Bernanke said in November:


    Let’s examine the remarks, and I’ll **make my own comments afterward:

    “Thank you for inviting me to speak today. I will take this opportunity to present an update on the economic outlook.”

    **I tend to take that seriously, in that I expect when he says this that he does intend to as accurately as possible ‘present an update on [his and/or the Fed’s] economic outlook.’

    Then he says:

    “Over the next year or so, the economy appears likely to expand at a moderate rate, close to or modestly below the economy’s long-run sustainable pace.”

    **If he’d have thought that 1st quarter GDP would soon be 0.6%, annualized, would he have said so?… Or, did he in fact suspect it would be this low and was unable to say so?… I don’t think 0.6 fits to a description of an economy that is expected to ‘expand at a moderate rate, close to or modestly below the economy’s long-run sustainable pace.’ So, what I’m saying is that if the chairman of the Fed, at the rather late date of November 2006, wasn’t able to tell us, then, that 1st quarter GDP would be 0.6, then why does anyone think he can now tell us the economy will grow at or modestly below trend over the next few quarters?

    **My point is that no Fed chairman would ever (never, ever, e-v-e-r, NEVER, EV-ER) downgrade GDP to at or near recession level, except in the most academic sense of the present-to-past tense. In other words, a chairman might recognize the current status of a weak economy and make comments accordingly when the event has become a fait accompli, but he will nEvER EvER pReDiCT one. Predicting that weak of an economy is not in the cards for any Fed chairman.

    **We got better economic forecasting from Roubini than we got from the Fed, and Bernanke is sitting on an entire army of staff assistants, researchers and statisticians… and he has the advantage of being made privy to at least some information likely not available anywhere in the public sector, so why is it so hard for a government official with such power of influence to simply get it right?

    **The answer is that the Fed will only forecast either robust economic growth or, at the worst, they will forecast a kind of lamenting recognition of growth that is ‘at or slightly below trend.’ If the Fed ever were to forecast a recession, you would later find that you’d been least likely to have been forewarned of it by them, unless you’re Rip Van Winkle.

    Here’s what Bernanke said just on March 28th, 2007: **my comments to follow.


    “Economic growth in the United States has slowed in recent quarters, reflecting in part the economy’s transition from the rapid rate of expansion experienced over the preceding years to a more sustainable pace of growth. Real gross domestic product (GDP) rose at an annual rate of roughly 2 percent in the second half of 2006 and appears to be expanding at a similar rate early this year.”

    **This was said in late March and Bernanke at that time was still holding to an estimate that GDP would be at or very near 2% for “early this year.” You can’t get any earlier than the 1st quarter, and late March is already 9/10s of the way through the 1st quarter, so why would anyone believe now that the chairman could accurately forecast the economy going forward, when he couldn’t forecast it, then, when it was already 90% history? I would have more confidence in the Fed if it refrained from making economic forecasts, but only because it is probably philosophically prohibitive for it to make a bad one. If it is predisposed to never make a bad one, then most all of its forecasts must be discounted if one is to maintain a consistent logic about the veracity of the institution. Rick Santelli on CNBC has said Bernanke doesn’t make forecasts. He’s wrong. Here’s an example of the forecasting from last July:


    “Overall, the U.S. economy seems poised to grow in coming quarters at a pace roughly in line with the expansion of its underlying productive capacity. Such an outlook is embodied in the projections of members of the Board of Governors and the presidents of Federal Reserve Banks that were made around the time of the FOMC meeting late last month, based on the assumption of appropriate monetary policy. In particular, the central tendency of those forecasts is for real GDP to increase about 3-1/4 percent to 3-1/2 percent in 2006 and 3 percent to 3-1/4 percent in 2007. With output expanding at a pace near that of the economy’s potential, the civilian unemployment rate is expected to finish both 2006 and 2007 between 4-3/4 percent and 5 percent, close to its recent level.”

    And again from the same testimony:

    “The projections of the members of the Board of Governors and the presidents of the Federal Reserve Banks, which are based on information available at the time of the last FOMC meeting, are for a gradual decline in inflation in coming quarters. As measured by the price index for personal consumption expenditures excluding food and energy, inflation is projected to be 2-1/4 percent to 2-1/2 percent this year and then to edge lower, to 2 percent to 2-1/4 percent next year.”

    **Well… they’re 0 for 2, since they missed the aught-point-6 Q1 GDP, and I think most reasonable people will also assume they missed on in-flaggelatin’ in-flation, which they can’t do anything about without runnin’ the risk of blowin’ up housin’ or trippin’ the light fantastic of the dee-riviting derivatives markets.

    Earlier in that prepared testimony Bernanke said this: **my comments to follow.

    “With respect to the labor market, more than 850,000 jobs were added, on net, to nonfarm payrolls over the first six months of the year, though these gains came at a slower pace in the second quarter than in the first. Last month the unemployment rate stood at 4.6 percent.”

    **That was said on July 20, 2006, and while it’s of course generally accurate regarding jobs during the first half of 2006, almost every rational observer of macroeconomics was already at the time sending up warning flares regarding the rapidly reversing condition of the housing industry, which directly and indirectly employs better than 20% (some claim as high as 35-40%) of all workers in the U.S. We now know that the at least implied continued jobs-gaining momentum of the Fed chairman’s comments regarding a somewhat healthy 850K jobs in the preceding 6 months, even though he said the gains were at a ‘slower pace’ later in the period, was, although unintentionally, totally misleading regarding what the job situation was at that time developing into. Let’s suppose the chairman had said this instead: “We’ve had 850K jobs created during the last 6 months, but it looks like we’ll have possibly near zero new jobs, net, created over the next 3 months.” I’m not saying he could’ve known this in advance, although many rational commentators were at that time evidencing real fears that it was happening, but I am saying he’d never have said it… never, ever, n-e-v-e-r, e-v-e-r… and that is something that is so hard to understand as to be practically equivalent to the average person’s understanding of theoretical physics. The human heart simply can not accept the philosophical inconsistency found in situations in which public figures may think one thing and yet say the opposite. Often when it is more important than EVER to have the truth about something, that is precisely the time in which public figures will distort it, either for their own purposes or as a sort of benevolent and paternalistic pep-talk that they generally assume is for our own good.

    Here’s The Big Pic on July 13, 2006 regarding the subject of a job slowdown:

    And here’s Caroline Baum’s story linked in that Big Pic topic:


    **Both of these items were far better than Bernanke at predicting the upcoming jobs slowdown, and consequently a worse GDP for Q1 2007 than he was still predicting even as late as March 28, 2007, so what do we need the Fed for? Too, the 606K NFP (or a little under 500K prior to final updates) jobs that BLS declared during the quarter in which these pieces were written (that now BED tells us were actually only 19K) gave all the ammunition needed by optimists and slowdown naysayers to discount the reality of what was happening to jobs at that time, that has now largely contributed to the near recession level of 0.6% GDP (annualized as Barringo reminds us) for Q1 2007.

    Rick Santelli, here’s some more pretty specific forecasting by the Fed as recent as Feb 2007, if you’re paying attention to The Big Pic:


    “Overall, the U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes. Such an outlook is reflected in the projections that the members of the Board of Governors and presidents of the Federal Reserve Banks made around the time of the FOMC meeting late last month. The central tendency of those forecasts–which are based on the information available at that time and on the assumption of appropriate monetary policy–is for real GDP to increase about 2-1/2 to 3 percent in 2007 and about 2-3/4 to 3 percent in 2008. The projection for GDP growth in 2007 is slightly lower than our projection last July. This difference partly reflects an expectation of somewhat greater weakness in residential construction during the first part of this year than we anticipated last summer. The civilian unemployment rate is expected to finish both 2007 and 2008 around 4-1/2 to 4-3/4 percent.”

  24. Eclectic commented on Jun 6


    “I would have more confidence in the Fed if it refrained from making economic forecasts, but only because it is probably philosophically prohibitive for it to make a bad one.”

    I meant to say “philosophically prohibitive for it to forecast a recession.”

  25. The Big Picture commented on Jun 9

    It’s A Low, Low, Low, Low Medium-Rate World

    I would be remiss in my duties if I failed to point out that this recent run up in yields — fundamental explanation here — occurred a few short months after the cover of BusinessWeek declared: It’s A Low, Low, Low, Low-Rate World Back in November, I …

  26. The Big Picture commented on Nov 21

    Breaking the Business Week Cover Curse?

    It’s A Low, Low, Low, Low-Rate World. No, really — it is. The yield on the 10 Year was under 4% — briefly kissing 3.99%. This directly contradicts our prior discussion of the Magazine Cover Indicator (for more on the magazine cover indicator, see thi…

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