3.36% interest on the 10 year treasury note is not 'astronomically high'. Historically, it's actually pretty low. 2 years ago, before the market started down, the interest on this note was about 4%. That is pretty normal for that note. At the time, that corresponded to 6% on a 30 yr fixed rate mortgage for those with good credit. 3.36 indicates that US debt is still viewed fairly favorably vs other bonds available globally. The trend however, which is up from a low of 2% around the first of the year, indicates US debt is getting less attractive than it was 5 months ago. I don't think the day is far off when the US will be paying 4% (and much more) to get global investors to buy these notes.
On the morning after, I listened to Mohammed Al Arian (PIMCO) whose insight always helps me see things a lot clearer. It seems that though the rate on the 10 yr notes is not too high in historical terms, the short term trend is troublesome. It seems that most everyone holding US notes sold off yesterday. The reason, according to Al Arian is that the US has offered no hint of a plan (credible or otherwise) to get out of this situation of huge deficits and to a place where we can repay. The world is beginning to question the quality of US debt.
Consider this. Our government is scheduled to borrow trillions of dollars annually. From whom will we borrow these funds? Every other country in the world is in even worse shape than the US. They are all seeking to borrow. If everyone is a borrower, who is able to lend? In this climate, how will we fund these deficits? We might be able to find a yeild high enough to attract some money, but it could take a lot. At the same time, the lack of a credible plan - a favorable outlook for recovery, makes our currency less attractive. Why? because if you can't borrow the funds, then you have to squeeze them out of your own people somehow, or printa boatload of money and pay off debt with devalued currency. We are painting ourselves into the "Mother of all Corners".
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