An Important Development in the Bond Market Yesterday

Lost in the Bernanke Shuffle yesterday, was the breakout in the 10 year bond over 3.5% yesterday. After a huge spike from October 2010 to mid December, the 10 year has been rejected at the 3.5% level roughly 4 times the past 6 weeks, but whatever macro views that pushed gold up during the Bernanke song and dance, also had bond participants selling bonds.

Takeaways? A huge bonus for the banks as they can borrow at zilch and now get even more risk free return than usual. But a potential issue for the housing market as mortgage rates are tied closely to this yield. And some combination of worry about future potential inflation and/or confidence in future growth in the U.S. economy. (it can be both) Put another way, the market saw yesterday Bernanke will not take his foot off the accelerator despite his pledge on 60 Minutes he has everything under control and when the time comes he can change directions in 15 minutes. Like every Fed move the past few decades, it is becoming clear the Fed will be late at their change of direction in policy… and cause another massive dislocation.

In a country dependent on cheap money but stuck with middling wage growth, the market seems to be saying to expect higher prices along with higher borrowing costs down the road – not a great combo. I think the market will give this a pass up to 4.0% on the 10 year which was the high back in April 2010 when confidence was high that everything was benign – then we flash crashed, and Greece came to pass and there was a major reversal. Any move over 4.25% will start to act like a gasoline tax as borrowing costs begin to jump.

About Mark Hanna 542 Articles

Affiliation: Hanna Capital, LLC

Mark Hanna is President and Owner of Hanna Capital, LLC, a registered investment advisory firm. Mark has been a follower of markets since the late 80s, with a focus on individual equities since the mid 90s. He has been a well known commentator in the financial blogosphere for the past 5 years, following a career in corpoporate finance and accounting. Mark attended the University of Michigan where he graduated with a degree in Economics.

As an avid reader, Market Montage is the personal blogging site for Mark to share his views on economics, markets, and the like. Occasional cynicism and wit shall be deployed in his postings.

Follow Mark on Twitter @fundmyfund.

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