The Long March Up for Interest Rates

Interest rates on Treasury securities have shown a steady climb upward for most of this year. The interest rate on ten year Treasury securities bottomed on January 15 at 2.23%, since then it has been a steady climb. As of Friday, 10 year Treasuries were up 166 basis from the Jan. 15 low, for a current yield of 3.89%.

There are three factors that can account for this:

A. The fact that M2 nsa money supply is not growing means that there is no net new money in the markets to buy the Treasury debt (although the Fed is buying some of the new debt, but sterilizing the buys).

B. Since fear in the markets has subsided (most likely temporarily) some money is moving out of Treasury securities. This can explain the current up move in the stock market.

C. The huge amount on new money that the Treasury has been raising has resulted in huge new supply of Treasuries, putting upward pressure on rates.

What does all this mean, long term?

As I have said before, you will be able to make a career out of shorting Treasury securities over the next decade. There is no way that the borrowing demands of the Treasury are going to do anything but grow for the foreseeable future. This will also result in "crowding out" of the private sector and be a negative for the stock market.

I continue to view the current uptick in the stock market as short-term in nature, mostly fueled by a decline in the desire to hold cash. The longer term influence is Fed money printing, which is not going on at present. Bernanke is erratic in his policy as far as money supply and this could change at any time, but right now I have to forecast with the numbers in front of me which tell me there is not a lot of money around to keep the stock market pushing much higher. Climbing interest rates is further evidence of this.