BOND ALERT: HIGHER TREASURY YIELDS AHEAD! / MACLEOD FINANCE

Bond alert: higher Treassury yields ahead!

The chart below shows that the yield on the 10-year US Treasury note is set to rise

ALASDAIR MACLEOD

Charts are not infallible, but this one tells us that there is a high degree of inevitability that the yield on the 10-year US Treasury Note is set to rise. 

Recently, the yield tested the golden cross formed by the 55-day and 200-day moving averages and has subsequently moved higher. 

The longer-term four decades chart puts this in another worrying perspective:

 In August 2022, the chart broke a 42-year downtrend, always contained by the Fed reducing interest rates to rescue the US — and the world’s — economy from the fallout of bursting credit bubbles. 

Consequently, malinvestments and other economic distortions haven’t been purged from the system and are now rolled up into the biggest credit bubble ever seen. 

The consequence is heightened credit risk, which is now systemic, reflected in rising borrowing costs.

Part of this story is the debt trap which the US Government now faces. 

Macroeconomic analysis suggests that the Fed will respond by reducing interest rates to contain credit risk and stop the zombie economy from collapsing and taking down the commercial banks. 

But the error in this line of thinking is to not understand that risk and borrowing costs correlate: in other words, higher interest rates reflect increasing credit risk.

That the four-decade long downtrend in US Treasury yields was finally broken in August 2022 is confirmation that the Fed no longer controls interest rates: the market has taken over. 

No doubt, as rising rates start bankrupting zombie corporations, and inevitably create a stock market crash, any attempt by the Fed to reduce interest rates will undermine the dollar.

While it is unthinkable for today’s investors that the Fed can lose control over interest rates, there is historical precedent. 

Three time following the 1844 Bank Charter Act, the Bank of England did precisely that: in 1847 only three years after the charter was granted, 1857, and 1866. 

The error was to not realise the true function of interest rates, which was to manage the gold reserves, and not influence economic outcomes.

We don’t have a gold exchange standard today, but the same principal applies. 

If the Fed muscles rates lower at times of high credit risk, it simply undermines the currency. 

And just as the Bank of England erred after the 1844 Act, we can be certain the Fed will do so in 2025. 

And just as England’s gold reserves faced a run on those occasions, today the gold price will rise, which put another way will see the dollar’s purchasing power decline at an accelerating rate.

A word to te wise: get out of credit!