Ben Bernanke said it, and we’ll pay the price.
Earlier this month, the Fed chief acknowledged to a Senate finance panel that the Fed governors saw inflation moving a little higher “temporarily.” This is something new for this Fed, and both the bond and stock markets didn’t hesitate to respond.
Most individual investors do not pay much attention to the yield on the 10-year Treasury. And there is good reason for that — bond pricing is complicated, with its inverse price-to-yield dynamic.
But when it comes to buying a house or a car or getting a personal loan, these instruments are all tied to the Treasury market, and the 10-year is the Dow Jones industrial average for consumer borrowing.
Bernanke and Co. have enjoyed an historic run in the bond pits. The yield on the 10-year has hovered around 2 percent for the past 18 months or so, while the Fed eased the economy out of recession.
At the end of last year, the benchmark rate was yielding 1.87 percent — dirt-cheap, if you needed a loan and could qualify.
That all changed this month as bond vigilantes awoke from their hibernation to hear Bernanke utter the dreaded “R” word. They sold off their bond holdings in droves. If inflation is running at just above 3 percent, then it does not make sense to hold bonds yielding 2 percent. It’s a losing proposition.
The government bond market has more than $15 trillion in total Treasuries outstanding, and the Fed holds almost $3 trillion, making it the largest single player.
Yet it holds only 20 percent of the market, so there’s plenty of room for the bond vigilantes and regular market players alike to push back a bit, and that’s healthy for a market. The pushback, however, can get expensive for consumers and small businesses alike.
This means higher mortgage rates, which hit a five-month high on Thursday, according to BankRate.
This is something families looking to buy a home can ill afford. Many just give up and rent.
If you’re looking to combat higher fuel prices — which are indirectly tied to the Treasury-bond market through dollar strength based on the creditworthiness of Uncle Sam’s paper — auto loans have jumped 12 percent this year.
Small-business loans, if you can qualify, will also cost more, something an economy with 8 percent unemployment and 16 percent “underemployment” doesn’t need.
While the Fed has spent the last three years and “invested” almost $3 trillion trying to keep market-based interest rates as low as possible, a slight change in language by Bernanke and a stubborn energy problem could paint the Fed chief \into a corner.
Bond yields have backed up almost 0.4 percent (40 basis points) since the Fed’s press release hit the wires. That’s almost a half-point rise in the rate many consumer and business loans are tied to.
In it was an acknowledgment of sorts that inflation is in the “short-term” air.
“The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.”
And that was the key takeaway for the bond market from the Fed’s note.
Nypost.com
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