Professor Elam

Friday Dec 11 2009

The 30 year T Bond auction did not go well this week, buyers are now under water no their purchases as the price of the bonds has declined as rates have risen. Buyers are demanding more and more yield to stomach the huge supply coming to market. Granted the late 2008 low was an extreme, the 30 yr scae is at left. We are now up some 200 basis  points since then, and this while the FED maintains we have low rates. Indeed what will happen when rates really start raising. The spread on bonds versus bills is the widest since the early 1980s. This typically forecasts inflation expectations.   Bernake is at a loggerhead, raise rates the govt and variable rate mortgages all pay more. But the market is raising rates for Ben, he does not have to.