A Dangerous Bond Bubble

By: Marty Chenard | Fri, May 15, 2009
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As reported two weeks ago: spreads had been sending a caution sign for the risk of yields rising. That has been happening, and the 30 year yields are rising ...

It was June 2008 when the 30 yields had hit its last peak level before dropping. From there, it down trended until it hit a low not seen in well over a decade.

That low was made in December of last year. Since then, the 30 year yields have been rising ... this was not just a rise, it was a rise that penetrated a 10 month Resistance line.

Why is this important?

Because the Fed has a mission to keep 30 year mortgage rates below 4.5% in an effort to give the housing industry a chance to recover.

With the 30 year yields moving above this long term resistance, the markets are saying that risks levels and the threat of inflation demand higher yields.

The Fed is saying, "no, we want the yields to stay low".

The Fed has already spent over $100 billion in purchasing Treasuries in an effort to keep rates down.

Just as the yields are now breaking through a long term resistance, the Fed is going into battle and is expected to buy another $300 billion in bonds over the next 6 months in a continuing effort to force mortgage rates lower.

So, rather than normal market forces interacting with each other, we have the overt manipulation of Fed interference.

It is a zero sum game in the end for the Fed because they will cause a bubble in bond prices that will have an ugly ending.

Pete Seeger's song lyrics had it right ... When will they ever learn?



Marty Chenard

Author: Marty Chenard

Marty Chenard
Asheville, NC 28805
Tel: 828-296-1200

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