The Phaserl


The Quantitative Beatings will Continue Until Economy Improves

by Keith Weiner, Gold Seek:

The Fed’s purpose, when it comes down to it, is to buy bonds. Under their various “Quantitative Easing” (QE) programs, they sure have bought a lot of bonds. This pushes up the price of the bonds. Since the yield is basically the inverse of the bond price, this means the rate of interest falls.

This month, on rumors that QE will be tapered off and despite continued Fed bond buying, the yield on the 10-year Treasury bond has spiked from 1.63% to 2.12%. Will this be the end of the bull market in bonds and the start of rising interest rates in the US in earnest? I rather doubt it, as all of the dynamics that have created this bull market are still in place. And as the other bond markets of the world experience greater trouble (such as Japan today), capital will come pouring into the dollar and the Treasury.

It has been quite a bull market in bonds. Here is a chart of the yield on the 10-year Treasury.

The recent blip is hardly noticeable on this chart, which shows the fall from 16%.

This is all good, right? It’s a bull market, so people are making money. The cost of borrowing to finance a new business is near its all-time low. The deficit to GDP ratio is kept in check by low interest payments too, as any Keynesian will tell you.

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