Tags: Snyder | Treasury | yield | rates

Blogger Michael Snyder: Ballooning Treasury Yields Will Pop the US Economy

By John Morgan   |   Wednesday, 21 Aug 2013 08:13 AM

Investors who want to monitor the source of the next financial disaster should be keeping an eye glued to U.S. Treasury yields, according to Michael Snyder, author of the Economic Collapse blog.

The yield on 10-year U.S. Treasurys is regarded as a key barometer because it affects many other interest rates in the financial system, from mortgages to consumer loans. That yield has been nudging toward 3 percent in recent weeks, and is up nearly 120 basis points since the start of May.

Snyder cited a litany of potential ills if interest rates continue on their upward trajectory — it will be more expensive for the state and local governments to borrow money, the housing market will be harmed, consumer debt interest will rise and the huge amount of federal debt from quantitative easing (QE) could implode.

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"We are truly moving into unprecedented territory, because we have been in a bull market for U.S. Treasurys for the last 30 years," Snyder wrote.

"Many investors don't even know that it is possible to lose money on U.S. Treasurys. They have been described as 'risk-free' investments, but that is far from the truth."

If Treasury yields hit 3 percent, it will be harmful to the U.S. economy and be a drag on stocks, Snyder stated. But he said a July Bank of America Merrill Lynch investor survey predicted that if yields rise even higher to 3.5 percent, it will trigger a "disorderly rotation" or spiral of higher rates.

According to Snyder, a primary reason Treasury yields are increasing is that foreign holders, who own a huge amount of U.S. bonds, are becoming net sellers.

"Unfortunately, there is no way that the party that the U.S. government has been throwing can continue without foreigners buying our debt," Snyder explained.

"We have added more than $11 trillion to the national debt since the year 2000, and according to Boston University economist Laurence Kotlikoff we are facing unfunded liabilities in future years that are in excess of $200 trillion."

The surge in 10-year Treasury yields means the Federal Reserve is currently sitting on about $200 billion in mark-to-market losses, ETF Guide estimated.

Rick Rieder, chief investment officer for fundamental fixed-income at BlackRock, predicted 10-year rates will rise after Fed tapering of its $85 billion monthly bond purchases kicks in, Bloomberg Television reported.

"You have got to taper down QE. It has created this tremendous distortion in interest rates," Rieder said. "We think fair value on the 10-year is close to 3 to 3.25 percent. You are getting very close to there."

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