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Wednesday, June 10, 2009

The U.S. Treasury Bond Can Bring Obama Down

The biggest financial news of th day was the disastrous performance of the Ten Year U.S. Treasury Bond offering today.

US Treasury prices fell on Wednesday, sending benchmark yields to eight-month highs, after an auction of 10-year notes heightened concerns about the cost of financing the burgeoning U.S. budget deficit.

It was the first test of the government's long-term borrowing ability since investors began to wonder last month whether the United States' prized AAA credit rating may be living on borrowed time.

This continues a trend now more than a month of the U.S. Treasury bond rate shooting up. Today's offering is more evidence that the market will make the government pay to borrow the amount of money that President Obama is determined to borrow.

To put things into perspective, at the end of April, Ten Year U.S. Treasury Bond rates were at about 3%. They are now trading just below 4%. With this, mortgage rates have gone to just below 5%, to about 6%.

The short term effect will mean a very bloody month of June for real estate. Between long waits and exploding interest rates, I expect millions of loans to blow up as locks expire. This will be clear in both mortgages closed, which will plummet, and in real estate prices, which will take a massive hit this month.

In the more intermediate term, I expect the benchmark ten year U.S. Treasury bond to hit 5% before the end of the summer, if not sooner, unless the President announces he is reversing course on some of this spending. The bond offering today is only the beginning and this bond offering is saying the same thing they've all said recently. The bond market is telling the president that borrowing trillions will be very expensive.

The ramifications for the entire economy will be massive. A ten year U.S. Treasury bond at 5% means mortgage rates at 7%. That means the average borrower would pay about $400 a month more on a $200,000 mortgage over their lows at 5%. That would trigger further declines in real estate values, increases in defaults, and of course increases in foreclosures.

This would also translate into higher rates on car loans, student loans, business loans, and frankly all other loans. Raising borrowing costs somewhere around 2% means whatever jobs will be "saved or created" by the stimulus, will be overwhelmed by the lost jobs that higher borrowing costs will mean.

If the Republicans have any political savvy, they will coordinate a full attack on Obama's economic policies as soon as the Treasury hits 5%. By then, there will be no getting around what his policies have created. About two in three people on their own home or property (condo, two unit, etc) Even if they aren't now buying, selling or refinancing, a homeowner is acutely aware of what higher mortgage rates mean to them. Many homeowners are aware of what property values are doing in their own areas. As they see property values falling, they will be able to make the connection from that to rising mortgage rates.

Furthermore, the move of the treasury from 3% to 4% is a business story. Once it moves to 5% it is a news story. The public will be engaged. Furthermore, it is a simple story to tell. The president borrowed money we don't have. That raised all borrowing costs. Now your car loan, student loan, home loan, and business loan are more expensive.

If the Republicans are really politically savvy, they will put the fear of God into all. They need to get on every media that will have them and make the case that unless Obama's domestic agenda is stopped, interest rates will continue to go up until our economy collapses. That's not so far from reality. Today's bond offering was only $19 billion. Obama wants a trillion plus more. You do the math. Republicans need to get behind a populist movement to repeal the rest of the stimulus.

This is also an easy story to tell. The stimulus hasn't created any jobs. It has, however, raised rates, by then, two full percentage points. That hurts the economy and causes us to lose jobs. In order to get out of the recession, we need borrowing costs minimized. The only way to minimize them is to repeal the stimulus. By doing so, the President's entire agenda, platform, and economic policy would be wholly rejected. To do this, the Republicans would need to create a grass roots revolt. Of course, nothing is as motivating to a revolt as seeing your mortgage rate go up 2% in the span of four months.


Anonymous said...

Conversely, you'd be validating the fears of democratic voters that the republicans are teaming up with the private sector to scuttle the economy in an attempt to effectively overthrow Obama.

Simply put, it sounds like you're treating Obama like Hugo Chavez.

mike volpe said...

I am not doing anything but analyzing the situation. The market is doing this to Obama. You are putting in facts not in evidence.

The reason that U.S. treasury bonds have exploded up is because the market recognizes that borrowing this much will have to cost more than it currently is. This isn't the Reps or me but the market, and it's perfectly natural.

Simply put, Obama's entire domestic agenda is making borrowing costs higher. That's not me, Repubs or anyone but Obama.

This isn't the private sector teaming up to do anything. You can't force people to buy treasury bonds. In fact, if anything, it is the Chinese who have stopped buying them themselves.

The private sector doesn't "team up". It acts in a natural way to stimulus. Obama wants to borrow a lot and that will cost him. By raising treasury rates, that raises all borrowing rates. It's that simple and it's something self inflicted.

Anonymous said...

Well, if he'd stop acting like Hugo Chavez, maybe people wouldn't treat him that way.

Mike Dugas said...

Don't waste your breath Mike. No matter how bad it gets it will NEVER be Obama's fault. Failure will be the responsibility of everyone else,
no matter what. You can't convince them otherwise. Democrats helped create, shore up and hype this financial debacle to use as a set of blinders to force change they want and to gain power they crave.
For example, many economists state that the financial bottom has been hit and is on the rebound, yet the stimulus portion on that bill hasn't even been spent yet and wasn't going to be until 2010. Why even spend it now? If the economy is on the way back without that spending then it doesn't make any sense to spend it...unless you are looking for the power, control and debts to be owed in the doling out of those funds. Then it makes perfect sense. Hense Obama talking about speeding up the spending. This is all about changing our system of government from one that works FOR the people to one that the people work for. The same centralization of power that has destroyed so many countries and civilizations in the past.

Anonymous said...

Sooner or later, we're going to need a list of things both Republicans and Democrats can agree to stop spending money on. Its the only way its actually going to stop.

CoachingByPeter said...

If a good real estate agent can help grease the wheels and get your offer in front of a lender, you can get an answer more quickly, and potentially close more deals.

personal trainer austin said...

"the move of the treasury from 3% to 4% is a business story. Once it moves to 5% it is a news story."

There will have to be some real pain being experienced before MSNBC and the like start reporting on it.