Wednesday, May 27, 2009

New Investor Worry: Treasury Selloff Spiking Interest Rates

Of course, higher interest rates are GOOD for economic recovery. But the government thinks it can alleviate long term economic hardship by forcing interest rates to near zero, when in reality all they're doing is prolonging the hardship. Better to get the pain over with now, in the short term, than push the recovery back and intensify the pain and suffering. There will be pain and suffering, no matter what the government does. The less they do, the less pain there will be.

    The stock market is watching the bond market, wary a spike in interest rates will derail a fragile economic recovery and snuff the market's rally.

    Stocks tumbled Wednesday, but the real drama was in Treasurys and mortgages.

    A selling spree in Treasurys pushed rates higher, taking the yield curve to its steepest on record as spreads between the 2-year and 10-year widened by over a dozen basis points on Wednesday alone.

    The 10-year saw its yield move above 3.70 percent, after trading at 3.55 percent the previous day. The selling wave hit bonds shortly after 1 p.m., even after the auction of $35 billion in 5-year notes was well received.

    "It was a great auction. It was just the follow through that was a problem," said Brian Edmonds, head of interest rate trading at Cantor Fitzgerald.

    Traders are bracing for more of the same Thursday. The Treasury is auctioning another $26 billion in notes, this time 7-years.

    The heavy issuance - more than $100 billion this week alone - has been pressuring the market.

    Some key data will also get the market's attention Thursday, including weekly jobless claims, durable goods and new home sales.