What Is Going On In the Bond Market?

Interest rates globally have moved up approximately 50 basis points (.5%) over the last month with the bulk of that move having occurred in the last week. What is going on? What is driving this move higher? A harbinger of better days ahead or an indication that the massive deficits in selected nations will require higher rates to attract capital? Or both of these reasons and a lot more. Let’s navigate.

1. First things first, even with the backup in rates recently, let’s be cognizant that for the year the 10yr US Treasury rate is lower by approximately 50 basis points.

2. What global bond market has had the biggest rout recently? Spain. Spanish 10-year bonds have backed up almost a full 100 basis points (1.0%) over the last month.  Overnight Spain was put on a watch list by Moody’s for a potential downgrade. While the fiscal mess in Ireland is off the front page for the time being, the massive fiscal deficits in the peripheral nations of Europe remain and will definitely require higher rates to attract capital. As European bonds sell off, our bond market is not about to stand still.

3. Improving emerging economies will need to continue to raise rates in order to stem the prospects of higher inflation. That reality will drive rates higher globally as well.

4. What domestic issues are driving our rates higher? I see two major factors:

  • The municipal bond market is backing up quickly as the Build America Bond program will very likely be discontinued. That reality is causing a wave of supply to hit the market prior to year end. Investors are demanding higher rates to fund these deals.
  • The likely passage of the tax package extending the Bush tax cuts is viewed as an economic positive BUT also a net negative in terms of increasing our deficit.

The BIG question for investors, though, is whether this increase in rates is a reflection of real structural improvement in our underlying economy and will we see job growth? The jury remains out on that question–but call me doubtful.

I would ask, if the economy is improving, WHY does the Fed still see a need for quantitative easing. Additionally, is the market sending a major middle finger salute to Ben Bernanke and Tim Geithner? I believe so. How’s that? Even in the face of the Fed being a $600 billion buyer in the market, our rates are headed higher to attract REAL money and REAL investors to fund our massive federal and municipal deficits.

Additionally we should be aware that a government–that being the US of A–that is willing to devalue its currency–and it is–in order to deal with its deficit is a much higher risk for investors.

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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