Interest Rates

July 27, 2009 – On July 13th traders sold short the Sep’09 T-note at 118-21. The yield on the 10-year T-note that day was 3.38%. Stop out this T-note short-sale if its yield closes below 3.32%.

For convenience, I am going to begin tracking interest rate trades on the basis of the T-note’s yield at the end of each day, rather than the futures contract. By using yield as the measure for record keeping instead of futures, traders who use ETFs will be more easily able to follow my recommendations.

T-note yields have climbed since my recommended short sale, and closed Friday at 3.66%. I think they have much further to climb as inflation worsens.

The jump in the June PPI and CPI is a wake-up call that the inflationary threat of the Federal Reserve’s easy money policy combined with the federal government’s huge budget deficits is real and rapidly approaching. Gold and T-bond prices are moving in opposite directions (gold is heading up while T-bond prices are falling), providing further confirmation that the market is beginning to focus upon future inflation and demanding higher yields to offset this risk.

T-note yields fell to about 2.0% in December, culminating the panic rush into US government paper after the collapse of Lehman Brothers. Even though yields have since then climbed rapidly, there has not yet been a rush out of this paper reversing last year’s inflow. In other words, holders of US government paper have not yet begun a rush for the exits, but they eventually will. Yields seem destined to climb much higher. Consider that the federal debt now stands at $11.6 trillion, approximately 80% of the nation’s GDP, which itself is a clear warning sign that trouble is approaching. Even more alarming though is that this debt grew $2.1 trillion over the last 12 months. Debt is out of control, and T-note yields will rise as a result.