Tuesday, April 27, 2010

Treasury Yields

Treasury Yields soar high into the sky recently after reports about the payroll have been released.


The yield on 30-year Treasurys briefly came within a hair of 5% before settling back to the 4.75% range. The ten-year note's yield hit 3.9%, driving 30-year mortgages, which are priced off that ten-year note, over the 5% mark.


For the benefit of everyone, yields rise in advance when great news about the job market are released. Why is that so?


It's pretty logical actually. When more people are equipped with a job, they earn a reasonable amount of income and this increase their purchasing power and their marginal propensity to consume. Hence, there is a higher spending rate and the demand will rise as a corollary.



With a rise in demand, prices will increase and this will lead to the infamous inflation.


In the end, the interest rate will be raised to curb inflation.


Or, if you want a simpler explanation, when people are equipped with a job, the unemployment rate will fall and then inflation will settle in, without a shadow of a doubt. End of story.



The speculators have already pronogsticated that there will be a rise in interest rate in the future so they will naturally raise the yields now.


Also, as the yields rise, foreigners will start to invest in their debts because they offer high returns. "Hot money" will start to flow in and the supply of U.S. dollar will drop because foreigners buy these debts with U.S. dollars. Bear in mind.



Then the strength of the U.S. currency will rise for sure, leading to a rise in imports and a fall in exports. That is very bad because it will just to more trade deficit.


The U.S. government already fraughty with a plethora of troubles surrounding its deficit now.


Credits -marketwatch, -elliottwave, -ega

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