Yesterday, Ben Bernanke told the House Budget Committee:
"In recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen…[t]hese increases appear to reflect concerns about large federal deficits…"
Hmmm. I would swear that Treasury Secretary Geithner just told China that rising interest rates were a sign of optimism for the U.S. economy. Can rising rates be both good and bad? All I know is that if you listen to government long enough, anything and everything is possible.
Rising interest rates on Treasury bonds mean that prices are falling. Whether you’re talking dollars or doughnuts, prices tend to fall when there’s oversupply. And right now, with the Federal government raising trillions to fund stimulus spending and budget deficits, there’s a more-than-adequate supply of T-bills.
Competition also affects interest rates, or yields, on T-bills. If the arcane valuation formulas running on server banks in the basement of some hedge fund say that the stock market is likely to post an 8% gain, few managers will get too excited about the 5% return on long bonds. That 5% yield must rise (with the price of the bond falling) to entice buyers.
So when Geithner says that rising yields indicate optimism, he’s telling the truth to a degree. Yes, now that the economy is recovering a bit, investors believe that stocks are a better investment than bonds. And that’s good. But one reason stocks are attractive is because bonds are so unattractive.
*****I suspect the Chinese know all this. They probably also know that they benefit by lending us money. Heck, if Chinese money delays the hard choices long enough, they may ascend to the throne of world’s largest economy sooner than expected.
*****Bernanke also took the opportunity to warn Congress about rising deficits. He said "Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth."
Let’s not forget Bernanke has supported the policies that got us where we are. Now let’s see what he proposes to help get us out of this mess.
*****The last time I made the observation that the news cycle was turning negative, we saw stocks consolidate their recent gains, instead of turning lower.
Well, it seems to me that the news cycle is starting to turn negative again.
Bernanke repeated his belief that the recession is ending, but the financial media chose to latch on to his statement that recovery will be slow. Improving manufacturing data was deemed "not-as-good-as-expected."
Will this lead to a sell-off, another period of consolidation, or will more positive data emerge to keep the markets moving higher? I don’t know, but I am on alert…
That’s it for today.
P.S. One way to help insulate your portfolio (particularly if you’re retired or even if it’s a few years off) from the government’s loose monetary policy is by holding dividend stocks. These stocks give you a regular payout and have tremendous upside. Be sure to check out my new research report with five such winning stocks right now. You can get it HERE.