Federal Reserve puzzled by yield curve steepening

[dkf]

By Alister Bull - Analysis

WASHINGTON (Reuters) - 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.

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.

http://www.reuters.com/article/ousiv/idUSTRE54U1NZ20090531

[Speck Tater]

1. "What does it mean?" Presuposes that buyers of bonds are all-knowing and can see the future.

That's a pretty dumb assumption.

If, on the other hand, we assume that buyers of bonds don't know a damn thing about what the future will bring, then what it "means" is absolutely nothing whatsoever.

[dkf]

3. Problem is proposed solutions are different and depend on what is

causing it.

I was tracking 30 year mortgages...about 2 weeks ago it was 4.75% with 1 point, 1 week ago, it moved to 4.875%. On Tuesday it moved to 5. On Wednesday it was 5.5! Then on Thursday back down to 5.25.

I'm not sure I have the days exactly correct, but it went something like that. I was sitting there thinking how crazy it was.

[Speck Tater]

4. I think that most economic indicators have decoupled from reality

and are chaotically fluctuating based on investor mood swings. As far as I'm concerned this is a very good time to step back and just be a spectator.

[dixiegrrrrl]

7. check this out

from May 26 to May 27 the rates jumped almost 30% ????????





oops.here's link:
http://market-ticker.denninger.net/archives/P3.html

[dkf]

11. 6.52%? Double Ouch.

Damn that is not good.

[roamer65]

12. If it continues, a double-dip recession will definitely occur.

The effect will be similar to the nasty 1981-82 downturn of the 1980-82 double dip recession.

[nradisic]

2. It's the banks stupid!

Yeah those banks... the one's getting the bailout money, cutting credit lines, increasing interest rates and not lending....yeah those banks. Until we "fix" them, as American taxpayers, we will continue to pay double....give them taxpayer dollars while being shafted - we are getting it both ways!

[BlooInBloo]

5. For those who don't know what the yield curve is....

http://en.wikipedia.org/wiki/Yield_curve

"In finance, the yield curve is the relation between the interest rate (or cost of borrowing) and the time to maturity of the debt for a given borrower in a given currency. For example, the current U.S. dollar interest rates paid on U.S. Treasury securities for various maturities are closely watched by many traders, and are commonly plotted on a graph such as the one on the right which is informally called "the yield curve." More formal mathematical descriptions of this relation are often called the term structure of interest rates."

Typical example:

[dixiegrrrrl]

6. Deninger answers the questions in his column today..

bot the bond market issue and the mortgage issue.

http://market-ticker.denninger.net/archives/P3.html

[dkf]

9. What is with his assertion about September 24th and the

NY Fed Reserve?

[roamer65]

10. The NY FRB is the branch where all market operations occur on behalf of the Fed.

It is a known fact that since the ending of the official M3 money supply report, double digit increases in the money supply have been occuring. I would bet what he found was a botched attempt to drain liquidity from the system. Sept 2008 was right around the time of the Lehman Brothers collapse, wasn't it?

[dkf]

13. Yes it was...

But he was saying he felt it was deliberate to chase money out of the stock market and into bonds.

[roamer65]

15. Hard to prove on his part since the Fed has zero accountability.

Then I would tend to doubt his assertion, just by my feelings...OR it could have been a deliberate attempt to shore up the investment houses at the sacrifice of the stock market. Who knows?
For example, I know I left stocks and foreign funds well before Sept 2008, maybe at least a year before it. I just felt deep down that something really bad was coming and therefore moved most of my money to a decent TIPS fund as a precaution. I am still thanking my lucky stars I made that decision, all based on a "feeling".

A lot of this financial stuff, even at the Fed level is by "feeling", aka gambling.

[dixiegrrrrl]

14. And the Pres. of the NY FRB was....Geithner.

[roamer65]

8. It's fairly simple.

Investors do not want the Treasury's long bonds (10 and 30 yr bonds)at current interest rates due to the increased debt monetization by the Federal Reserve. To attract buyers, a higher rate of interest has to be offered. If the massive deficits and debt monetization continue, I expect long bond rates to rise into the mid-teens to twenty precent within a year or two.

I recommend that if you buy Treasury paper, you buy TIPS (Treasury Inflation Protected Securities). They will at least adjust with the inflation rate.

The Federal Reserve isn't at all "puzzled" by this. They know exactly why it's happening.