Treasury, USD And The Fed

The Fed continues to ignore inflation which is truly mind boggling.  They know it is here, they want it but they refuse to acknowledge it.  Bernanke will quote the TIPS break even (TIPS minus Treasury Yield of similar maturity) as the inflation expectation yet ignore all other signs as demonstrated in today's FOMC minutes.  

"Despite further increases in commodity prices, measures of underlying inflation remained subdued and longer run inflation expectations were stable."

The Fed is playing a very dangerous game here with the bond and currency markets. Today saw the biggest threat in the ongoing Middle East crisis with Hezbollah ready to wage war on Israel and Iran sending their navy through the Suez canal for the first time since 1979.  The flight to safety trade, albeit short was very concerning as bonds and the USD did not catch a bid, but rather precious metals.  Precious metals are quickly becoming a new currency.  At least 20% of US states are passing legislation that would allow another currency in addition to the USD.  

It's quite possible the days of the USD being the reserve currency have passed.  The implications are massive.  Equally massive is the bond market and the signal it is giving to the Fed and DC.  It is concerned about inflation. It is concerned about the lack of Fed credibility.  It is concerned that DC continues to put politics ahead of fiscal policy.  The market is speaking and Bernanke appears ready to continue his aggressive and reckless policies.

10 Year Treasury

Appears to be consolidating ahead of another leg down.  The implications to housing are massive.  A 100 bp move equates to roughly a 11% drop in home prices.  

5 Year Treasury

The National Debt is rolled about every four years.  With 14 trillion in debt, a 100 bp move in yield equates to $140 billion USD additional interest expense.  Imagine tacking on another $140 billion in debt?  There will be no more stimulus to the economy.  The Federal and State governments will now drag economic growth.  

2 Year Treasury 

The short end of the curve had stayed low but not anymore.  The yield curve is flattening as the shorter maturities rise faster.  So not only do banks face a flattening curve but higher rates throughout all maturities.

USD - Need I say more?  It cannot catch a bid.  The world is speaking and they no longer believe in the strength of the US economy.  A sad day indeed.

My apologies if I sound like an alarmist.  As a father of two children, I truly worry about the future facing them.  I worry about the massive levels of unemployment that are ignored through government accounting and spin.  There are many people hurting in this country and throughout the world.  A global revolution has begun.  Let us hope that they and the markets can speak loud enough to force a true "change we can believe in."

Treasury, USD And The Fed