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US Government Bonds – Sinking Fast

Click on the graph to see the source file

Click on the graph to see the source file

The chart above is of the TLT ETF index mutual fund for the +20 year US Treasury. This is an ugly chart.

It has broken down decisively today as the sale of the 5 year Treasury was very weak. Investors are extrapolating that if people are not very interested in tying their money up for 5-years at today’s rates, significantly fewer will be interested in tying it up for +20 years UNLESS bond rates move much higher.

Readers of this blog know that we have been forecasting higher bond market yields in spite of our forecast that the Federal Reserve will keep short-term yields low. This has been playing out all year, but it has been via yields in the one and two year range falling with the +20 staying relatively flat. Now, I think you’ll see investor expectations start to drive the +20 year yields higher in order for the government to continue to fund our budget deficits, and a further steepening of the yield curve.

And this is just the start. Wait until we get to 2013 (see my blog post from earlier this month after a meeting with a soon-to-be US Senator and his view of 2013).

I’ve been reading some analysts discussing the strong possibility of a double dip recession in 2011-2012. If this comes to pass (and I have not yet bought into their theory) we could see economic contraction and significantly higher bond yields – not a pretty scenario for anyone that is hoping for falling unemployment to increase the tax base and reduce the deficits.

But all of that is in the future. Right now, we only have investor reactions to today’s government bond sale and their initial take on it is that rates will be higher in the future.

Your trivia for today: you probably recognize the British singer in the video above. In 1969 he and Eric Clapton formed a group that released only one album. The artwork on the album caused quite a stir (I recall my mother not at all pleased with her son owning it) and it wasn’t the airplane that was the issue. Can you name the singer, the group he formed with Eric Clapton, and what was on the album cover that caused such consternation.