Thursday, May 28, 2009

Interest Rates Continue to Climb on the Long Bond

Treasury yields and mortgage rates surged Wednesday to their highest levels since November.

The yield spread between two-year Treasury notes and 10-year notes widened to 275 basis points, its highest ever. This makes it extremely profitable for banks, investment banks and anyone else who can do it, to borrow short term and lend long term.

The huge, approximately two trillion, in Treasury financing expected this year is what is putting pressure on the markets. That and the fact that Asian countries have stopped aggressive buying of Treasury securities.

Soon the markets will also wake up to the fact that the Social Security Trust Fund is winding down its huge Treasury security buying program and that by 2016 it will turn into a net liquidator of Treasury securities.

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