Longer Treasury Yields Reaching Critical Juncture

The yield on the 30-Year Treasury Bond is now over 4.60% and the 10-Year Treasury Note is yielding 3.75%.  It was just at the last bond auction that the T-Bond was 4.49% and sold at 4.52%, and the 10-Year’s yield was a mere 3.20% on November’s closing yield.  Most traders will look at the prices of the on-the-run bond futures rather than an outright yield, but that inverse relationship between price and yield is always present.  These rising yields might not be a major concern on the surface and when considering we are in the holiday trading with lower market participation, but these yields look like they are bumping against the highest yields in July and August.  Much more weakness in price will have these yields at a critical juncture and where rates will be headed in 2010.

I have recently noted, “If (ergo when) Long Bond rates are closer to 5% next year after the FOMC finally starts raising short-term rates in a game of catch up…..” Unfortunately, this looks like it may be closer to becoming an issue sooner rather than later.

Historically you see at least some retail demand for Treasury notes and bonds at each incremental higher percentage point.  Many market pundits have called longer-dated bond prices the next bubble that will burst.  If that occurs, then it won’t just be the 4.00% yield for the 10-Year Treasury and 5.00% yield for the 30-Year Treasury that will be debated.  The debate will be if these Treasury bond and note yields should be trading around 6.00% and 5.00% respectively.

JON C. OGG
DECEMBER 22, 2009