Is the bond market talking to us? The yield on the 10 year Treasury note is now at 3.61%. The 10 year Treasury note is by far the most important bond. Most of the mortgages are based off the 10 year note. The housing market is one area in the economy that is still facing major headwinds. Foreclosures and delinquent mortgages continue to rise. This fact remains even with the U.S. government offering an $8,000 tax credit for first time home buyers and the $6500 tax credit to anyone that buys a house. One can only think that the government and the Federal Reserve Bank do not want to see a rise on the 10 year Treasury note.
Yields have been exceptionally low for quite some a while. However, there was something interesting that we noticed. The last time the 10- year yield hit 4.00% was in early June. This happened to coincide with a one month stock market pullback into July 10th 2009. This was the longest pullback in the stock market since the March lows. Did the 4.00% yield really affect the stock market in this negative way?
There is an old saying on Wall Street that says ‘the bond market knows best’. This could certainly be the case. The 10 year bond could be hinting that rates need to go up. What would happen to this stock rally if rates go higher? What is going to happen to the housing market if foreclosures and delinquencies continue to rise? Eventually the Federal Reserve bank will be forced to raise rates on would think. Remember the bubble that Alan Greenspan caused by lowering the Fed funds rate (overnight rate from the Federal Reserve Bank to large banks) to 1.00%. The current Fed Chairman Ben Bernanke has lowered rates to 0-0.25%.
What happens from here? Is there another bubble in the making? These and many other questions remain to be seen. We shall all find out soon enough.
