Steepest Yield Curve On Record

Yesterday, the difference in yield between the 2-year Treasury and the 10-year note hit a new record.  Massive government borrowing is pushing interest rates higher, especially on longer durations.

The U.S. will likely sell $3.25 trillion of Treasuries in the fiscal year ending Sept. 30 to fund bank bailouts, stimulus spending and a record budget deficit, according to primary dealer Goldman Sachs Group Inc...

Rising 10-year Treasury yields are pushing yields on mortgage bonds higher, prompting holders of the securities to sell government debt used as a hedge to protect portfolios against rising interest rates...

The unprecedented government borrowing has created concern about a rise in consumer prices. Policy makers have expanded the Fed’s balance sheet to $2.2 trillion while excess reserves at U.S. banks have increased to $896.3 billion.

This is a battle between the Fed and the Treasury. The Fed is trying to keep interest rates low, especially mortgage rates. Government spending is forcing Treasury to borrow. It looks like the Fed is having trouble keeping up.


Previously - Treasury Yields Headed Higher
The Silver Lining

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At the time of publication Mr. Cale held long positions in TBT

Source:

Dakin Campbell. Yield Curve Steepens to Record as Debt Sales Surge.
Bloomberg. May 27, 2009.
http://www.bloomberg.com/apps/news?pid=20601103&sid=aDoudpT9wy_I&refer=us

© 2009 Michael Cale