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How Much Higher Can U.S. Treasury Yields Go?


Ron DeLegge, Editor
August 19, 2013

The yield on 10-year U.S. Treasury bonds (^TNX) has already surged more than 53% year-to-date. How much higher can rates go up? 

The chart below gives us a historical point of reference. It shows the yield spread (or difference) between 10-year Treasury yields and the Federal Funds Rate (FFR). The yield spread between both benchmarks has never been more than 400 basis points or 4%.

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And today, with 10-year yields now around 2.90% and the FFR between zero and 0.25%, the 10-year yield would need to shoot up to 4.25% to break historical records. That leaves a potential 1.35% upside in 10-year yields, should the FFR hold steady and should rate relationships stay within their historical limits.

The 2013 selloff in U.S. Treasuries (NYSEARCA:IEF) is the 13th largest over the past 50 years and bond investors (NYSEARCA:AGG), especially holders of longer maturating debt, are getting clobbered.

The iShares Barclays 20+Yr Treasury Bond ETF (NYSEARCA:TLT), which tracks U.S. Treasuries with maturities of 20 years or longer, has been crushed 14% year-to-date. With TLTís 12-month yield now near 2.92%, it would take almost five years of yield just to recoup 2013ís year-to-date losses! Of course, thatís assuming no further spikes in interest rates, which is a fairyland view at best.

Conversely, itís been a great trade for Treasury bears. Inverse Treasury ETFs that climb in value when rates rise like the ProShares -2x Treasury 20+Yr Bear ETF (NYSEARCA:TBT) ahead by +24.38% and the Direxion -3x Treasury 20+Yr Bear ETF (TMV) up +34.48% year-to-date.

Because of surging interest rates, the Federal Reserve is sitting on roughly $200 billion in mark-to-market losses, as our just released September ETF report highlights. Will losses in the Fedís bond portfolio top a trillion dollars? Could it lead to a central bank solvency crisis?

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CommentsAdd Comment

Ron the Editor said on August 20, 2013
  RS - Great observations. Loss of faith in paper is a game-changer

Jack Lewd - Love the user name.

EarlW - Thanks for the post!

KENDRILL - The Fed's accounting tricks may have no end, but the the tolerance of financial markets has limits.

grant8 - What can I say? A great take as always.
Ron Surz said on August 20, 2013
  Fiat money (pieces of paper) once had "Redeemable for silver", but that was a long time ago. Our US pieces of paper now say "In God we trust" but there are a lot of people who don't believe in god and apparently still believe in pieces of paper.

We've got serious problems when we stop believing in pieces of paper.
Jack Lewd said on August 19, 2013
  I see no problem with US Treasury yields. Scribble Scribble.
EarlW said on August 19, 2013
  grant8 - I concur with your view that the ECB and BOJ are closer to the tipping point vs. the U.S. Federal Reserve Bank.

KENDRILL - The U.S. Treasury prints money, not the Fed. But you are right on about the accounting tricks.
KENDRILL said on August 19, 2013
  The Fed can print money which means it can sustain infinite losses and still declare itself a solvent concern. It's all a matter of accounting tricks, which after 100 years of practice, have grown quite sophisticated.
grant8 said on August 19, 2013
  The Fed going bankrupt is definitely a Black Swan but in terms of "getting hosed" I think the ECB or Bank or Japan would go bust before the Fed. Seems like Europe and Japan are closer to the brink than the US. For sure, they're all in deep trouble.
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