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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35351  
Subject: Re: Gump Question Date: 1/3/2009 9:11 AM
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I have what likely is a stupid question, but I'm confused nonetheless. Yesterday, I read two articles that suggested that the Treasury bond bubble is about to burst, which will result in the collapse of Treasury bonds. My question is: Does this mean that interest rates on Treasuries will go up or down?

The tradable value of bonds correlates inversely with yield. So, if the "bubble" bursts, traders will start selling treasuries, which will mean you can buy more face value for the same $$$, which is to say you will get a higher yield. Also, any new issues would need to be competitive, so the coupon would need to be higher than if there was a new issue in current context.

Don't forget, at the same time these folks are making their bubble bursting prediction, others are saying long Treasuries are headed for zero yield, and the only thing we know is that those who make predictions are wrong much of the time and are never asked to document their track records, so what they say is worthless.

I know, admitting my predictions are always wrong, that I wouldn't touch Treasuries with a 10-foot pole, but I said the same thing when they were yielding 5%. It is clear the Fed and the Treasury are fighting desperately to keep down interest rates in the hope of stimulating the economy. At the same time, the national debt this fiscal year (according to the Post this morning) may be $2 trillion (I've been saying $1.5 as a minimum, including the SS surplus, so this is not a shock). The rest of the world isn't flush to buy Treasuries and neither are the hedgies, so it is hard to see how to keep yields down, other than that the Fed has said it will buy Treasuries (i.e., print money to buy Treasuries).

In other words, too many conflicting factors to take any prediction seriously. At some point arithmetic will prevail and borrowed money will need to be paid off and printed money will be inflationary. Maybe not today, maybe not tomorrow, but someday and for the rest of our lives.
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