Sense on Cents

In Wall Street terms, the wheels are coming off the Treasury bus. What does that mean in layman’s terms? Interest rates on U.S. Treasury securities are ratcheting higher. Why? I have addressed the massive supply of global government bonds that will be issued in order to finance the exploding deficits. For newer readers, you can find my thoughts on this topic in Is The Government Bond Bubble Getting Ready To Burst? UPDATE #2.

The dynamics of the massive supply of bond issuance to fund global deficits will not change. To wit, our market needs to absorb $60 billion in 5yr and 7yr notes tomorrow and Thursday.  Long term interest rates in our U.S. Treasury market moved higher by another 10 basis points again today to a level of 3.55%.

Over and above that, though, there is another significant reason that is driving our bond market lower and interest rates higher. This reason is receiving little to no attention by the media or market analysts. In fact, the color allocated to this factor is strictly viewed as a positive. I am talking about the waves of mortgage refinancing precipitated by the Federal Reserve’s quantitative easing program. 

How could refinancing activity further pressure the government bond market driving interest rates higher? Well, let’s accept the premise that any government program is never risk free or cost free. The quantitative easing employed by the Federal Reserve to purchase government and mortgage-backed securities has very real costs. The extraordinary volume of purchases of newly issued mortgage-backed securities by the Federal Reserve has allowed millions of homeowners to lower their mortgage payments. This is great for those benefitting. What are the costs? (more…)