Rising Treasury Yields

The Federal Reserve announced its Quantitative Easing part II (QE2) program late last summer. The stated goal was to 'buy down' interest rates through the purchase of longer dated Treasury securities. By further surpressing interest rates, the thesis went, the economic recovery would gain more traction.

To purchase those bonds, the Fed essentially creates money out of thin air. Some folks refer to this as 'monetizing the debt.' A country sells sovereign bonds, and then prints money to buy those bonds back.

The Fed is currently on the record that it wants to purchase ~ $700 billion worth of Treasuries in this manner.

We can discuss the wisdom of this policy some other time. Here, I wanted to point out that since the QE2 announcement, long term interest rates have been going up instead of down. In the graph below, divide the TNX number by 10 to get the yield on the 10 yr T-note. The yield on the 10 yr note currently stands at about 3.3%--up nearly 100 basis points since October.

The bond market seems to be either sniffing out either a) a strengthening economy, or b) inflation.

Either way, given that our economic and financial systems are operating in a state of high leverage, and that the Fed is intervening in unprecedented ways in the Treasury market, staying close to interest rate levels and trends should improve your market awareness.

Keep an eye on 'em...

position in TLT