Bill Cara: U.S. rates are rising, and spinning, Fri., Mar. 3, 2006, 7:21 AM

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March 3, 2006

U.S. rates are rising, and spinning, Fri., Mar. 3, 2006, 7:21 AM

As bond yields are rising, the long end yields (30-year) are rising faster. So talking heads are now spinning the unlikely story that because the yield curve is sloping upward, all is well. NOT.

Keep your eye on the ball. Rising rates may soon reach the 'tipping point' for some real estate owners who hold mortgages that come up for renewal.

I have previously told the story of a multi-millionaire friend, who owned a string of investment condos in 1990, when suddenly his income, as big as it was, was insufficient to service the mortgage debt, plus the rising property taxes etc. And he could not sell because the real estate values had fallen below the mortgages owing. He went bankrupt.

This cycle will have the same result for thousands, if not millions, of others.

And, as interest rates rise, the rates on credit cards will increase as well, which adds to inflation.

And bond portfolios are getting killed too, which doesn't help the 'wealth effect'.

So, just because the yield curve has started to slope upwards, all is not well in the economy. It is not well because rates are rising, and many people are being pushed to the edge, closer to bankruptcy.

Posted by Posted by Bill Cara on March 3, 2006 07:21:23 AM | Category: Bonds

Discourse

Unfortunately, a lot of people have IRA money placed in securitized mortgage debt in order to get the income. Not much is said in the media about that kind of risk, but unless you correct my thinking on this, a lot of people will be hurting here also.

Due diligence should always include checking the holdings of income funds before investing.

Posted by: spot at March 3, 2006 8:51 AM [link]

Can anyone explain this chart? Why would TLT be such a consistent outperformer versus the 30yr?
[URL=http://www.theimagehosting.com][IMG]http://images6.theimagehosting.com/tltusb.png[/IMG][/URL]

Posted by: ihatecnbc2000 at March 3, 2006 1:55 PM [link]

Sorry, not quite sure how to post an image yet. Let me try again.

Posted by: ihatecnbc2000 at March 3, 2006 1:59 PM [link]

One more try.

Posted by: ihatecnbc2000 at March 3, 2006 2:00 PM [link]

Oh well.

Posted by: ihatecnbc2000 at March 3, 2006 2:01 PM [link]

The yield curve has not started to slope upwards, of course. It is still inverted. See, e.g., http://www.bloomberg.com/markets/rates/index.html. It is flattening out, as the longer term maturity yields rise.

Perhaps, this is not surprising in view of Xiao Zhuoji's comments to the Shanghai Securities Times. Mr. Zhuoji is a member of the Chinese People's Political Consultative Conference (CPPCC). He said that China's foreign exchange reserve hit 818.9 billion dollars at the end of last year but what China really needs should be no more than 250 billion dollars and notd that that most of China's foreign exchange reserves are mainly invested in low yielding US treasuries (government bonds), effectively providing "low-cost" financing for Washington. http://news.yahoo.com/s/afp/20060303/bs_afp/chinaforexyuan_060303055128;_ylt=AjBJqA.pwvV7ugBcyOWdsVSmOrgF;_ylu=X3oDMTA5aHJvMDdwBHNlYwN5bmNhdA--

If the People's Bank reins in its Treasury purchases, what central bank is going to stand in its stead? If no such central bank materializes, the flood of U.S. Treasury debt won't get sopped up. If it doesn't get sopped up, values go down and yields necessarily go up. Consequently, and as you suggest, such yield increases will have absolutely nothing to do with a healthy economy and companies with pricing power.

Indeed, increasing Treasury yields can only burn debt-ridden consumers and corporations that have relied for too long on rolling debt over to lower interest rates.

Posted by: incometrap at March 5, 2006 3:00 PM [link]