Back in February, I
wrote about how the unprecented level of debt being created
to finance government spending would inevitably lead to inflation
once demand for U.S. Treasury bonds subsided and the Fed was
forced to print money to buy up the debt. With the market choking
in debt, we're already starting to see an erosion in demand. In
other words, the early stages of that process are underway, and
sooner than I would have expected.
Fox Business
reports today:
While the stock market is floating at levels way above its
early March lows, the Treasury market has been showing signs of
weakness as investors, who flocked to the safety of government
debt at the height of the credit crisis last fall, have now
turned their attentions elsewhere.
This leaves the U.S. Treasury Department, and in essence the
U.S. taxpayer, with a prospect of steadily rising costs of
borrowing -- especially as the Congressional Budget Office
projects a record deficit for the upcoming budget year.
From its mid-December low of around 2.06%, the yield on the
benchmark 10-year Treasury bond has risen steadily to 3.18%.
Meanwhile, the yield on the less-heavily traded 30-year bond
has risen from around 2.5% to 4.19% in Monday trading. Bond
yields increase as bond prices, and therefore demand, decrease.
Bond yields have been increasing as investor demand to purchase
record amounts of U.S. government debt has been subsiding. Last
week, bond prices fell after an auction of $14 billion in
30-years failed to meet expectations.
"These large auctions are starting to stress the system," said
Tom DiGaloma, head of fixed-income trading with Guggenheim
Partners. "There have been too many auctions held too
frequently, and the size of the auctions is growing too fast
for the market to handle."
While supply and demand always work in tandem, traders and
investors said the main issue in the bond market right now is
too much supply. The U.S. government has been issuing debt at a
quickening pace in recent months, in part to pay for increases
in government spending like $787 billion economic stimulus
package, but also to take advantage of lower-than-usual bond
yields.
The Fed has already been forced to purchase
government bonds to prop up Treasury prices. Add the looming
entiltement crisis (now
looming closer) and trillions of new spending on Obama
administration intiatives such as health care, and the
inflationary pressure will only become more severe.
And remember, the Fed won't want to slow down the economy by
raising interest rates, and even if they were willing to, they
don't have any options if the market simply doesn't have an
appetite for more debt. The only option is to print, print,
print. And so the inflationary spiral continues. Unless, of
course, we stop spending trillions of dollars that we don't have.
