[evilgenius]

What is going to happen when the US reaches the end of the treasury price increases? So far the yields have fallen, thanks to the Fed.

Quote from CNBC:

"The yield on the two-year reached 3.808% Friday afternoon, its lowest yield since September, 2005. The 10-year yield was 4.401%, its lowest yield since Sept. 11."

Lower yields mean higher prices. Higher prices mean that foreign investors are tempted to stay in the dollar, even with the dollar's precipitous fall. Without some help in the form of rate decreases in Europe, which might be forthcoming in the UK, but maybe not from the ECB, the Fed will not be able to sustain dropping interest rates. There is probably room for a few 'beauty' rate cuts, but then what?

A while back in some post I predicted bonds would do this in the short term. I thought gold would be shot down along with it, though, and that there would be a mechanism for the dollar to run up that would follow. I was wrong. When the Eurozone, unlike the UK, proved resilient enough to handle the credit crunch the Fed was foiled in its plan to undermine the Euro and with it the Russian led Euro bourse for oil. Now I think the resultant inflation in the US, earning in dollars, will be catastrophic. It will be especially catastrophic if the Fed continues to cut rates.

Yes, inflation can be somewhat offset by economies of scale regarding supply. Can that work, however, with inflationary pressures at this level?

Will Trichet throw the US a bone? What about France's new stance regarding Iran? Will the plan be to foist the mantle prematurely on the Euro as oil price peg so that the attempt fails?

[threadbear]

I thought lower yields implied lower price of bonds? I'm a complete bond idiot, but intuitively it makes sense. Oh, where have I failed?

[mattduke]

Price and yield move inversely on both stocks and bonds.

Last month TIC data showed net foreign selling of treasuries, applying a downward pressure on price and upward pressure on yield. Yet the opposite movement occurred, with a price increase and yield decline. The question is, who was buying? Were you? I wasn't. It seems the treasury market enjoyed some major buying out of the Cayman Islands. Hmm.

[NTBKtrader]

cayman islands = hedge funds and other various tax haven vehicles

so far inflation has not spread from oil and food prices into other goods, also gas prices are still relatively low compared to the oil spike, atleast for now, gas prices have a more direct impact on inflation in the short term

personally i think the housing bust will effect the broader economy and will allow for some rate lowering over the next year however the rate lowering will end quickly once the credit issues stabalise and if oil prices don't retreat. if america's economic problems hurt the rest of the world's economy and thus oil consumption and drop out of the oil bidding war then we might get some more room to breath..

my opinion

my long term outlook is 100% stagflation ...

[americandream]

$this->bbcode_second_pass_quote('threadbear', 'I') thought lower yields implied lower price of bonds? I'm a complete bond idiot, but intuitively it makes sense. Oh, where have I failed?

[NTBKtrader]

US loan default problems widen
http://www.ft.com/cms/s/0/7c453090-7ff7 ... ck_check=1

[drew]

Threadbear, the yield on a bond is determined by the rate of interest paid and whether the bond was sold to a buyer at a discount or at a premium. In other words if you buy a 1000 dollar bond paying 5% per annum and you paid $990 for it your yield will be higher than %5. If you bought at a premium the yield is less than 5%. You can negotiate to a certain degree with institutions as to what yield you can get on a bond based on the initial selling price.

Drew

[evilgenius]

Offshore, hmm, that probably means the involvement of the world's biggest private money launderer, Citibank. There has been a lot of talk about removing Chuck Prince from the lead role at Citi. Even with illicit drug production at the highest levels ever and with skim money from tin pot dictatorships runnings so high with the price of commodities enjoying such a boom there is still not enough going on to improve the fortunes at Citi and bring the share price into the promised land. The pinch on liquidity has probably really hurt Citi. They probably need the big bailout arrangement to help them buy bonds and prop up the dollar.

All of this and the Chinese make noise about leaving but stay in. It is very curious. What has Hank Paulson been telling the Chinese to keep them playing? My hunch is he is dangling a big carrot in front of them. It is at least as big as the US real estate market, maybe bigger.

[Micki]

$this->bbcode_second_pass_quote('', 'A')ll of this and the Chinese make noise about leaving but stay in. It is very curious. What has Hank Paulson been telling the Chinese to keep them playing? My hunch is he is dangling a big carrot in front of them. It is at least as big as the US real estate market, maybe bigger.

[MrBill]

Stocks and bonds do not have to move inversely to one another. They can converge or diverge depending on other externalities.

There is an inverse relationship between the price of a bond and its yield. As yield falls, the price of a (fixed coupon) bond rises.

Generally, as interest rates rise it lowers the present value (PV) of a company's future earnings (FV) thereby lowering its stock price as well. But it does not have to as the stock price is not only the PV of its future earnings, but also short-term expectations about growth and capital appreciation (share buy-backs for example).

But once you raise real interest rates high enough you choke off growth and that can hurt company's profits as well as translate into lower stock prices.

[mattduke]

MrBiill,

My statement was:

"Price and yield move inversely on both stocks and bonds."

By this I meant that the price/yield relationship is inverse, and it applies to both stocks and bonds.

[threadbear]

Thanks for clearing that up

Seriously, I've heard that bonds, which should be fairly simple and straightforward, can be the most difficult to understand.

[MrBill]

$this->bbcode_second_pass_quote('mattduke', 'M')rBiill,

My statement was:

"Price and yield move inversely on both stocks and bonds."

By this I meant that the price/yield relationship is inverse, and it applies to both stocks and bonds.

[Petrodollar]

...speaking of US treasuries, it appears that August 2007 may have signaled the beginning of the end of the required foreign support for the US dollar to sustain the huge twin imbalances. I'd pay close attention to the net US foreign outflow figures for September....(the following si an article from a gold website that makes some rather strong predictions)...

http://www.321gold.com/editorials/buckl ... 02407.html

$this->bbcode_second_pass_quote('', '[')b]The Global US Dollar Showdown
William (Bill) Buckler
Captain of The Privateer
Oct 24, 2007

Extracted from the Late October Issue of Bill Buckler's "Global Report"

The October 19 meeting of the G-7 Finance Ministers and Central Bankers in Washington which takes place in the wings of the IMF/World Bank meetings stands as one of the pivotal post WW II meetings. The European Union appears to have had its fill of false American protestations to the effect that the US has a "strong Dollar policy". The US has had no such policy for a long time. The US Dollar has been falling since early 2002 and the Bush Administration has done nothing to support it.

The Word from Europe is "Extreme":

On October 15, the President of the European Central Bank came out and said that he was paying "great attention" to American statements in support of a "strong US Dollar". The previous week he had said that he was paying "extreme attention". This is not so "coded" speech to the effect that the US Dollar is in danger of losing EU support.

A Matter of Balance - A Matter of Scale:

Over the past six years, Europe has added jobs at a faster rate than has the US. It has had a much lower budget deficit than the United States and is now posting higher productivity gains and a $US 3 Billion annual trade surplus as well as a global current account surplus. The US stands with a current account deficit of $US 860 Billion annually, about 6 percent of GDP. It is the US which is out of balance with the world, not Europe.

The Bernanke Fed's recent interest rates cuts while the US Dollar hovered near all time historical lows shows that the international value of the US Dollar is today only being held up by the courtesy of others - mainly Europe. Japan is not helping while it holds it official interest rates at 0.5 percent and fosters the "carry trade". China is holding down its currency.

[mattduke]

KaPow. 10 year yields increased 2.1% after Fed rate cut today.

http://finance.yahoo.com/q?s=%5ETNX

[MrBill]

$this->bbcode_second_pass_quote('mattduke', 'K')aPow. 10 year yields increased 2.1% after Fed rate cut today.

http://finance.yahoo.com/q?s=%5ETNX

[bodigami]

$this->bbcode_second_pass_quote('Petrodollar', '(')...)
...not sure if I would downplay the reserves of Japan and China with regard to Europe's holdings, but the point remains the same, the US dollar is being propped up by the "kindness of strangers," (including Saudi Arabia and some other oil-exporters), but the recent US Treasury data about does suggest that the "kindness" is beginning to wane.
(...)

[bodigami]

$this->bbcode_second_pass_quote('Petrodollar', '(')...)
...and here's the conclusion...

$this->bbcode_second_pass_quote('', 'T')he Alternative is Foreclosure USA:

Nothing better demonstrates the vehement denial of plain facts by the US Political Establishment than its recent moves to raise the official US debt ceiling by $US 850 Billion to almost $US 10 TRILLION as well as cutting US official interest rates by 0.50 percent! To follow that by going out and borrowing more is absurd. But that is what the US Political Establishment intends to do. That points the US and the rest of the world which has to lend the US the money towards an international version of foreclosure.

Foreclosing on the US not only means that the rest of the world stops lending more of its money to the US but also that the rest of the world starts showing up in the US and demanding repayment of all the past loans! This has now started happening as shown by the "TIC" data already reported. The US financial system will not be able to handle a situation where the world demands that they begins to repay debts. US market interest rates would soar, as would US Treasury rates. An instant US recession follows.

The Growing Spectre of US Foreign Exchange Controls:

If an accelerating outflow of funds now held by foreigners inside the US were to start, it is a near certainty that at some point in this accelerating outflow, the US would act to institute a version of FOREIGN EXCHANGE CONTROLS. In effect, these would prohibit funds owned by foreigners from leaving the US. For all those who had lent to the US, that would be a global catastrophe.

The recent freeze-up in the global interbank payments system would be small potatoes in comparison because the flow of money across the world's borders would also start to freeze up. Many smaller nations in this bind would promptly institute their own national versions of foreign exchange controls and some of them would simply seize American assets inside their borders and sell them in their own local markets, using the proceeds from the sale to compensate their nationals from the losses they had suffered from having their money blocked by the US. International trade and air travel would come to a shuddering halt. Factories beyond number would be standing still because required foreign components would not be arriving. Economically, most nations would be thrown backwards to function upon the productive means presently existing inside their own borders. Deep recessions and outright depressions would follow.

[Euric]

$this->bbcode_second_pass_quote('Petrodollar', '
')

The Alternative is Foreclosure USA:

Nothing better demonstrates the vehement denial of plain facts by the US Political Establishment than its recent moves to raise the official US debt ceiling by $US 850 Billion to almost $US 10 TRILLION as well as cutting US official interest rates by 0.50 percent! To follow that by going out and borrowing more is absurd. But that is what the US Political Establishment intends to do. That points the US and the rest of the world which has to lend the US the money towards an international version of foreclosure.

[Twilight]

Foreign exchange controls would be nuts. It's bad enough that investors may be taking losses on dollar-denominated assets, but telling them they can't take their money out of America would be a recipe for a run on every market. Under what possible circumstances would the US stand to benefit from that? Especially as oil exporting countries are heavily invested in the US. The phrase is starting to get worn, but no-one could be that stupid.