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Treasury Yield Curve Steepens To Record As Debt Sales Surge

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Is it time to end the SM rally or is this the start of the high inflation and bond market bubble burst?

My money is on the SM being sacrificed to drive people in fear back into the bonds and treasuries.


Treasury Yield Curve Steepens to Record as Debt Sales Surge

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By Dakin Campbell

May 27 (Bloomberg) -- The difference in yields between Treasury two- and 10-year notes widened to a record on concern surging sales of U.S. debt will overwhelm the Federal Reserve’s efforts to keep borrowing costs low.

The so-called yield curve steepened to 2.75 percentage points, surpassing the previous record of 2.74 percentage points set on Aug. 13, 2003. Yields on 10-year notes have risen more than 100 basis points since Fed officials said in March they would buy up to $300 billion of U.S. debt over six months to drive consumer rates down and lift the economy from recession.

“The markets are starting to grapple with the issue of what happens when the Fed exits and the Treasury needs to continue at the same pace,” said David Greenlaw, the chief financial economist in New York at Morgan Stanley, one of the 16 primary dealers that trade with the Fed and are required to bid at government bond auctions.

U.S. 10-year notes have lost 8.7 percent this year, according to Merrill Lynch & Co. indexes, while 30-year bonds have lost 25.5 percent. Two-year notes have gained 0.3 percent.

Investors are selling long-term Treasuries as the government borrows record amounts of debt to fund bank bailouts, stimulus spending and a record budget deficit. The U.S. will sell $3.25 trillion of Treasuries in the fiscal year ending Sept. 30, according to primary dealer Goldman Sachs Group Inc.

Balance Sheet

After selling $1.9 trillion of debt maturing in one-year or less in the fourth quarter, the Treasury is increasing sales of longer-maturity debt. Officials have boosted 10- and 30-year bond sales to monthly from eight and four times a year, respectively.

Investors are also shying away from longer-term debt as government officials inject cash into the financial system. Fed policy makers have expanded the central bank’s balance sheet to $2.2 trillion and pledged as much as $1.8 trillion in debt purchases, including $300 billion in Treasuries.

Inflation expectations have increased. Ten-year breakeven rates, the difference between yields on 10-year inflation- indexed bonds and nominal Treasuries of the same maturity, touched 1.9218 percent today, the widest the spread has been since Sept. 23.

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It Is Failing: ALL OF IT

I have tried to warn people since the summer of 2007 that you cannot "print" your way out of a credit over-expansion, nor can you deny the ultimate contraction in the economy and assets.

Bernanke and other policymakers, including both the Bush and Obama Administrations, have tried to deny reality.

You can't.

The Bond Market has had it with the games, and despite a "good" auction today signaled its disgust with the lies, the unending deficits and both bonds and stocks sold off at the same time:

I know I keep pointing out this chart, and what it means, but you can't ignore it. It is, in fact, everything.

This chart is not signaling economic recovery when on the same day the TNX jumps by 5% the market declines by 100 DOW points.

Guys, this is the start of the bond market dislocation that I have written about for the last two years. It may stop or it may accelerate, but this much is certain - even if it stops here the dream of a 4% mortgage that Bernanke has hawked as the "key" to housing stabilization is not going to happen.

When we got down into the mid 4s I told people close to me to either lock or refinance and do it now. Some did, some were holding out for that 4% number.

How's that look now?

Let me show you what happened on eRATE's real-time mortgage rate quoter this afternoon:

(click for a bigger image in a new window)

This was precipitated by a near-collapse in MBS paper about the same time the /ZN (10 year Treasury futures) took a huge dump.

You saw that right - the 30/fixed is now being quoted at 6.5%, up nearly 30% in one day.

I'm sure this will "settle down" a bit, but that sort of dislocation is what happens when you transfer the risk of insolvency to the Federal Balance Sheet and start playing games at The Federal Reserve.

By the way, this makes the payment for a $200,000 note at 5% worth only $170,000 at 6.5%.

Bluntly: Bernanke's screwing around just cost you 15% of the value of your house IN ONE DAY.

When the Treasury Market dislocates risk premiums go to the moon and EVERY sort of duration credit gets more expensive all at once.

The market calls all bets, Bernanke went all-in with 2-7 off suit, the flop came up A-A-K and the bond market is grinning.

Anyone care to bet what the bond market has for hole cards?

This will translate into corporate funding costs and when it does you're going to see a staggering impact on Corporate America, triggering another monstrous wave of bankruptcies.



Disclosure: Getting short everything and soon will be shorter than a mosquito if the government keeps this crap up.

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