Could U.S. debt be reaching a breaking point?
In the chart below of the U.S. 10-year Treasury, it looks like yields on U.S. bonds have bottomed out and are rising again.
As the chart below shows, in June of 2012, the U.S. 10-year Treasury note traded close to $135.00. Now 10-year Treasury prices have broken below $131.00—a decline of almost three percent.
As the prices for 10-year U.S. Treasuries declined, an interesting event took place on the chart. The 200-day moving average of the price of the U.S. 10-year Treasury note moved above its 50-day moving average—a bearish signal according to technical analysis. The last time this bearish crossover took place for the U.S. 10-year Treasury was at the beginning of 2011.
Chart courtesy of www.StockCharts.com
Yields have fallen off a cliff for the U.S. 10-year Treasury. In mid-June 2007, 10-Year Treasury notes were yielding about five percent. Now they only yield two percent! That’s a decline of about 60%. People (savers) living off the income generated from their U.S. bond holdings were destroyed as the yields collapsed.
But something is happening now. The yield of the 10-year Treasury has moved back to two percent from the low of 1.4% recorded near the end of July 2012.
Since the beginning of the financial crisis in 2008, U.S. bonds have gained extra attention by investors and institutions alike as they fled stock markets and ran for the “safety” of U.S. bonds. As a result, they drove the price of U.S. bonds such as the 10-year Treasury higher and caused yields to go down significantly.
In June of 2007, before the financial crisis fully brewed, the 10-year Treasury note traded below $105.00. Now the same notes cost little more than $130.00, meaning that 10-year Treasury notes have increased almost 25% in price.
Will investors flee the U.S. bonds market as the so-called economic recovery takes hold and the government no longer has a ceiling on how much it can borrow?
There’s definitely selling pressure in U.S. bonds, otherwise the yields would not have risen 30% since last summer. (Imagine if the Federal Reserve was not buying $45.0 billion worth of U.S. Treasuries per month; a move that keeps prices artificially low, because demand appears so strong.)
Trouble could be brewing in the bond market. Why? If the Federal Reserve is buying so many billions of dollars in bonds each month, but the yield on the 10-year Treasury is rising, something is out of whack.
What would happen to the yields on U.S. bonds if the Fed stopped buying them? U.S. bonds could be treading in dangerous waters.