By Nicholas Santiago on December 31st, 2009 12:33pm Eastern Time
How long can the Fed funds rate stay at zero percent? This is the overnight lending rate from the Federal Reserve Bank to the large banks such as J.P. Morgan Chase (NYSE:JPM), and other giant institutions. In June of 2009 the 10 year Treasury yield reached a high of 4.00% and this was really the only pullback in the stock market since the March 2009 bottom. Obviously the higher yield hurts the mortgage market. The key 10 year bond yield is now creeping back up toward that level again. Today the yield traded as high as 3.92% intraday. The Proshares Ultrashort 20+ year Treasury (NYSE:TBT) has risen from $42.00 on October 2nd, 2009 to $51.00 on New Year’s Eve. That is a better than 20 percent gain in three months for this ETF. The iShares 20+ long Treasury Bonds (NYSE:TLT) has done the opposite, however, this is a onetime ETF so the percentage loss is about 10.00 %.
So what is the point and who really cares? Well, considering the Federal Reserve Bank has been buying all these toxic mortgage assets and artificially trying to keep the yields low so the housing markets can try to recover it is unlikely that they want to see rising rates. Since the government started the modified mortgage program (program that helps people stay in their homes who can't afford to by reducing their payments by 20 percent) nearly 40 percent of the homeowners who enrolled were delinquent within one year. If the key 10 year Treasury yield raises this cannot be good for the so called economic recovery.
Many will argue that a rise in the rates or a step yield curve helps the large banks such as J.P. Morgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), Citi Group (NYSE:C), and Bank of America (NYSE:BAC). This is true if they were lending money or making loans. Everyone knows they are not and are simply making money by purchasing Treasuries. Remember when yields go higher Treasury Bond prices decline. This suddenly seems like the creation of another Frankenstein by the government and the Federal Reserve Bank.
Is this the next bubble in the making? What is going to come from all of this craziness? Many say this is the new normal. Perhaps it is. Will inflation take over the deflationary tailspin that the country is in? There are a lot of questions that remain unanswered. However, the last time that the bond market spoke this year the stock market listened.
Nicholas Santiago,
Chief Market Strategist
www.InTheMoneyStocks.com
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