Mendocinio County

Next week could be really big – 2/21/09

From Don Sanderson

2/21/09 Ukiah, Northern California Next week, some economically/financially important events are unfolding that well may portend a rapid economic dive off the cliff for the United States, much more quickly than anyone is predicting that I’ve seen reported in the usual media. But, the tracks are there. It concerns the U.S. Treasury bond market where Obama must go to get his stimulus funds and, increasingly, much of the rest of the money he needs to operate the government and fight his wars. Some background:

A good way to track the economy, given the amounts of money the U.S. government is spreading around, is to follow the yields of U.S. Treasury bonds. Whenever the U.S. spends money it hasn’t collected from taxes and fees, it must first get from the sales of bonds.

Some background: When one invests a certain amount of money in a bond, say $1,000, at an annual return of 15 percent, it is said that the bond has yielded 15 percent or $150. If the bond is then sold for, say, $800, the buyer still gets an annual return of $150, but that is a rate of return of 18.75 percent, the bond now yields 18.75 percent. So, if you read that U.S. Treasury bond yield has increased, this should tell you that the market for bonds has fallen, much as the stock market falls. Bond yields have been steadily growing.

The U.S. Treasury sells both short term, say 5 year, and long term, say 20 year, bonds. Those who invest in short term bonds may be uncertain with the future and don’t want to bet long term. So, the relative yields of the two types of bonds should give one an idea of how much faith investors have in America’s financial future. In fact, short term bond yields are low in historical terms relative to long term ones, indicating bond holders feel insecure.


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