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Dislikedhttps://www.federalreserve.gov/media...-broadcast.htm worth watching what she has to sayIgnored
And the bond market is beginning to smell a rat. If you bought 10-year Treasurys some time ago with at a yield of 1.8%, and inflation is heading to 3% or higher, youre experiencing the joys of inflation without compensation for years to come. Bond buyers hate that. They become reluctant, even as sellers become more eager.
So the 10-year Treasury yield jumped today, settling at 2.54% and then rising further in late trading, to currently 2.58%, up from 1.38% during the heyday in July (via StockChart.com):
http://wolfstreet.com/wp-content/upl...2016-12-14.png
The 2-year yield jumped to 1.26%, and then continued to rise to 1.29%, the highest since August 2009, and well over double the yield of 0.5% in July (via StockChart.com):
http://wolfstreet.com/wp-content/upl...2016-12-14.png
And mortgages followed, with the average 30-year fixed-rate mortgage sporting a rate of 4.27%. Mortgage News Daily provides some color:
Nearly every lender raised rates this afternoon some of them multiple times. At first that took the form of mere increases in upfront costs (i.e. the contract rate itself wasnt moving higher), but subsequent reprices added up to an eighth of a point in rate for several lenders. From a range of 4.125-4.25%, top tier conventional 30-year fixed quotes moved up to a range of 4.25-4.375% well into the highest levels in more than 2 years.
So what is spooking bond markets and mortgage lenders? It wasnt the rate increase. That was a given. It had been taken for granted by all market participants.
And it wasnt inflation that caused this surge in yields. The upward trend of inflation has been established and confirmed. And people are starting to believe in it: The markets inflation expectations as measured by the 10-year break-even inflation rate based on the yield spread between Treasury notes and Treasury inflation-protected securities has reached 2% for the first time since September 2014, up from 1.4% this summer, and up from 1.2% earlier this year.
Instead, what might be spooking bond markets and mortgage lenders is a Fed that, while slightly more hawkish than it had been, is not nearly hawkish enough to confront the inflation trajectory in time.
Theres something else thats tripping up the US Treasury market: the largest foreign buyers of Treasurys China and Japan arent buying anymore. In fact, Chinas foreign exchange reserves are dwindling, and it has been dumping Treasurys, not because of the Fed but because of its own struggles with capital flight and its impact on the yuan.
And the Japanese arent buying anymore. Net purchases of overseas bonds plunged 94% in November from October, to a mere $728 million, according to the Ministry of Finance. With typically 60% to 70% of these purchases in US Treasurys, it marks a sudden and huge shift from the buying binge earlier in the year, when Japanese NIRP refugees chased after better returns overseas. So far this year, Japanese investors bought $194 billion in foreign bonds, the most in the current data series going back to 2005. But that binge stopped in November.
Why did Japanese investors get spooked? They too see the rout in Treasurys and the potential losses lining up in the future. And it comes at a bad time: with their watered-down yen, they have to pay a lot for these bonds, and they have to pay fees to exchange their yen for dollars. It all adds up in what is still a low-yield environment, studded with a lot of unpalatable risks.
Despite the rout in Treasurys, junk bonds have soared for months, as the Hot Money returned to bet on Oil Nirvana. Read Treasuries Melt Down, Junk Bonds Boom, Yield Spreads Collapse
Finviz Chart - 10 Year US Bonds
http://finviz.com/futures_charts.ashx?t=ZN&p=d1
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