Quietly the 10 year bond yield has risen to and above 2.8%. This is significant and something that very few are talking about. Those in the mainstream that do mention it are pointing to the “strength” in the economy as the reason. This is pure hogwash. Interest rates are rising for one reason and one reason alone, foreigners are selling treasury bonds.
As you know, the Fed is and has been the “buyer of last resort.” They now own 1/3rd of the Treasury market and have purchased over 70% of all issuance for over a year now. In effect, the Fed “IS the Treasury market.” A 2.8% 10 yr. rate is almost a perfect double from where they were just 17 months ago. Another more startling way of saying this is that interest rates have moved up 100% during a flat economy and yet the sheeple sleep.
I mention the above because we have a Fed meeting that concludes on Wednesday. The debate again is whether the Fed will taper or not. As I’ve said all along, the Fed can never really taper because they are THE ONLY buyer left. A genuine taper would blow rates to and through the 3% level. A complete halt to QE done cold turkey would be a disaster which could see interest rates hit “round numbers” like 4, 5, and 10% on a weekly if not on a daily basis. How would the real estate market look then? How would anything financial look?
Everything financial now relies on interest rates that stay down. Car sales, retail sales, housing, stock prices etc. Not to mention the ability of the Treasury to actually pay the interest on their (our) debt. Rising interest rates in “normal” times is not a good thing for anything financial…these are far from normal times. The Fed originally created a zero interest rate environment to save the banking system…but they also created the environment for the end game. They essentially allowed (encouraged) reflation above and beyond the ability to repay. Debt was not “washed” away, paid down or liquidated from 2008 on, it actually increased greatly!
By “greatly” I mean nearly doubled on the federal level. What worked and “felt good” will soon not work. Think about this, debt on the federal level has close to doubled in 5 years and at the same time interest rates which were going down for a good portion of that time have now nearly doubled from their lows. I know this is foolish but everyone knows that 2+2 =4 right? If debt has doubled (2) and interest rates have also doubled + (2) doesn’t that equal 4? “4” as in how much more difficult it is to pay the debt service than it was just a couple of years ago? Most people will admit that if their mortgage, car payments and credit card bills doubled they would have a hard time making the payment…what if they quadrupled?
Yes I know, the higher interest rates do not immediately translate into higher payments until the debt “rolls over” but the conditions now are already in place for the “quadrupling.” …And this has occurred WHILE the Fed was “supporting” the bond markets. Where exactly would rates be if the Fed had not been monetizing? We may never know the answer to this because the Fed will more than likely ALWAYS be buying until the very end.
I thought I understood what Jim Sinclair meant by “it will be game over when the last pillar falls” but I do know for sure what it means now. The “last pillar” being the bond market. The bond market is the only “source of funds” left to keep the doors open. Higher interest rates on their own will not close or shut this source off but they are a “symptom” just as a headache normally accompanies a fever.
I would like to mention before finishing that the volatility in the bond market has gone almost comatose in a slowly rising (rates) fashion. This in itself is a warning sign, almost like the calm before the storm. “Volatility” is/will be a killer to the derivatives markets. I bring this up because interest rates directly affect $100’s of trillions and indirectly affect $100’s of trillions more in derivatives. The stock markets can do anything that they’d like leading up to whatever rate level turns out to be the “trigger point.” There is a trigger point for interest rates out there where volatility will launch to unprecedented levels and control of everything is completely lost. “Control” is what has allowed this game to continue, losing control of anything will lead to the loss of control of everything. There is of course the chance that the Fed will announce a “taper” which I would take as a public statement saying, “Sorry but we are pulling the plug, Happy New Year!”