It seems that rising bond yields may have finally started to compete for some of the investment dollars which have been either been investing in stocks or sitting on the sidelines. Today’s 10-Year Treasury Note auction for $19 billion pushed yields within sniffing distance of the 4% yield hurdle as rates went north of 3.99% for the new issuance. This puts tomorrow’s 30-Year Long Bond Auction front and center. This more than coincidental with the stock performance of today.
Late this evening we have the 30-Year Treasury Bond posting yields at the 4.75% mark, challenging two-year highs. Yields for Treasury long bonds (30-Year Bonds) reached almost 2.50% at the end of 2008 and early 2009. Yields were under 4% just at the end of April, and we can point to a nearly 70 basis point rise since just May 15, 2009. Ignoring a move of this magnitude is becoming harder and harder to do.
If rates hit 5% on that Long Bond or get much higher than 4% for that 10-Year Note, then it is likely that the money that has been chasing stocks for gains may decide to jump over to the safety of assured yields at higher rates than have been seen in months and months. You never know what the exact hurdle is that starts to lure investors off of the sidelines or out of stocks for the ultimate safety net of U.S. Treasury notes and bonds. But in theory this happens at each full percentage point for long-dated Treasury yields.
With a trade deficit continuance, a fresh record May budget deficit, a questionable dollar, and the fears of future inflation coming on strong, you have to wonder if we have yet to see the real peak in long-term bond yields. As the FOMC has yet to even signal any formal rate-change or any real policy change to the lower-end of the curve staying low, it seems hard to imagine that we have seen the highest rates in longer-dated Treasury bonds. All of this will become critical for the 30-Year Bond auction on Thursday.
China holds billions and billions of longer-dated Treasury bonds. Russia has already sold Treasuries to diversify some of its holdings. We’ll be following up with more detailed analysis and future levels to watch after the 30-Year Long Bond Auction on Thursday.
Stay tuned!
Jon C. Ogg
June 10, 2009
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