Reason for long term government interest rates to rise
The Federal Reserve is studying significant moves in the U.S. government bond market last week that could have big implications for the central bank's strategy to combat the country's recession.I don't think it is all that complicated. With the fed creating a lot of money and the Obama administration creating a lot of debt there is the simultaneous fear of inflation and with the debt growing it becomes a buyers market and those who are still buying long term bonds are demanding higher yields because they perceive greater risk as the government owes more money than any in the history of the world.
But the Fed is not really sure what is driving the sharp rise in long-dated bond yields, and especially a widening gap between short and long term yields.
Do rising U.S. Treasury yields and a steepening yield curve suggest an economic recovery is more certain, meaning less need for safe haven government bonds and a healthy demand for credit? If so, there might be less need for the Fed to expand the money supply by buying more U.S. Treasuries.
Or does the steepening yield curve mean investors are worried about the deterioration in the U.S. fiscal outlook, or the potential for a collapse in the U.S. dollar as the Fed floods the world with newly minted currency as part of its quantitative easing program. This might be an argument to augment to step up asset purchases.
Another possibility is that China, the largest foreign holder of U.S. Treasury debt, has decided to refocus its portfolio by leaning more heavily on shorter-term maturities.
With officials still grappling to divine the factors steepening the yield curve, a speedy decision on whether to ramp up the Treasury debt purchase program or the related plan to snap up mortgage-related debt seems unlikely.
The only surprise to me is that they have not gone even higher. We are already seeing reluctance from China and others who buy our debt. I think the Obama administration is also starting to scramble just to keep liquidity. With Obama's pie in the sky health care plans and energy plans along with the failure to address Medicare and Social Security it is very likely that the liquidity squeeze may force a rethinking of some of the liberal spending plans.