Yesterday, surging concerns about the unprecedented issuance of fresh U.S. debt pushed the difference in yields between Treasury two- and 10-year notes up to a record 2.75 percentage points, surpassing the previous record of 2.74 percentage points set on Aug. 13, 2003.
This is really bad news for the Fed that does all it can to keep mortgage rates low.
Usually a steep yield curve precedes a period of good growth. Whatever the reason and notwithstanding, I can’t detect signs of any decent growth in the near future.
This is a very serious challenge for the Fed that could force it to buy Treasuries much more aggressively than ever before and where, yes, some outside and discrete help from the East could be more than welcome.
In that context, next week’s visits of (1) President Obama to the Gulf and (2) the Treasury Secretary to China, could become more important than generally expected.
In my opinion, we now have a confrontational moment where the market is testing the Fed with both sides having very good reasons for doing what they do.
We all know that higher mortgage rates could easily postpone if not derail any recovery in the housing sector and because of that, a recovery as a whole.
In addition, fighting the Fed is normally bad tactics. I have no doubt the Fed will act. How strong and transparent Mr. Bernanke will intervene, is another question.
Nevertheless, it’s a fact that we are facing a critical moment as bonds remain under heavy pressure from concerns about the over-supply from the Treasury.
In the mean time, the just-released initial jobless claims eased a notch to 623,000 the week ended May 23. But the whole point to a further rising pool of unemployed for the nineteenth consecutive record week to 6.608 million indicates that jobseekers are having a very tough time finding work. Today's jobless claims report may be no surprise but the rising body of unemployed is a reminder of the hardship that the nation faces should recovery be prolonged.
Bottom line: Wait for the Fed to act
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