Treasury Bond Yields Soar on Fed Speak

Yields on 1o-year treasury bonds hit levels not seen since mid-2004 on Wednesday, after the Fed hinted that further interest rate hikes were on the horizon. Greenspan and Co. even added language to their policy statement that highlighted recent increases in inflationary pressures in the economy.

With oil prices over $55 a barrel and the housing market remaining robust, it’s quite possible the Fed will continue to raise rates throughout the remainder of the year. The areas impacted the most will be the fixed income and housing markets. If inflation picks up, the TIPS market should shield investors from some of that risk. Gold may do well too, but I think other commodities should outperform gold due to increased demand worldwide and limited capacity.

The stock market likely won’t be able to make any meaningful move higher until the Fed is finished raising rates. On that end it would be better if they raised 50 bp at a time, as many have suspected they might if inflation fears don’t subside, just so we get to their target rate faster. The quicker they get to a point where they can stop raising rates, the quicker investors can start to make good money in the stock market again.

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4 Thoughts on “Treasury Bond Yields Soar on Fed Speak

  1. Tommy Milf on March 23, 2005 at 10:08 AM said:

    What is the Fed’s target rate? Is it a specific number, or are they looking for a certain financial “environment”? If it’s the latter, what would this “environment” look like?

    With oil prices staying high, does conventional wisdom point toward a recession? Or will the nature of a free market develop alternative sources of energy and keep the great American machine chugging along? I believe (and hope) that the latter is true, but it seems to be taking a long time for these hybrid cars, hydrogen powered engines, or even ethanol to gain some momentum. Thoughts?

  2. Chad Brand on March 23, 2005 at 10:35 AM said:

    There is no way of knowing what the Fed’s target rate is. It’s not really an exact number, but merely a range where the economy will be growing steadily without meaningful inflation. Fighting inflation is the main goal of the Federal Reserve Committee. Most people’s best guess is perhaps 3.50% to 4.50% or so. After yesterday, the Fed Funds rate is 2.75%.

    As far as alternative energy, there is progress being made, but it will be a long term process. Government funding is still low for such efforts. Many have speculated that nuclear power may gain traction in the U.S., and liquid natural gas (LNG) terminals are taking center stage as well.

    Hybrid cars are gaining popularity, but Toyota has really been the only major car company to focus on them. Increased gas mileage standards in the U.S. would force GM and Ford to do the same, but the Administration has not done anything of the sort.

  3. Tommy Milf on March 23, 2005 at 3:12 PM said:

    Clearly the Administration is not going to take money out of its own pockets, but that is a politcal debate for another time.

    I was more wondering if you think the rising oil prices will motivate the country into finding alternative fuel sources (i.e. politcal rallies, people calling their congressmen, more money in private research) or will the country be too stubborn and let our economy screech to halt?

    I’ve always been under the impression that rising oil prices will cripple an economy that relies so heavily on the trucking industry and airlines for the transportation of goods. I feel like we will wait too long to develop alterative fuels and we will cease to be the economy that every other country envies.

  4. Chad Brand on March 23, 2005 at 3:38 PM said:

    Alternative energy is clearly getting some attention, I just think it will take a long time, and one of the things that could speed up the process would be governmental policies.

    There are companies working on fuel cell technology for automobiles, but that is a decade away at least from being practical. Coal and nuclear power is getting more attention, but again, you need government support to speed up the process. From a corporate perspective, you need incentives to motivate a capitalistic society.

    The same goes for hybrid vehicles. Ford and GM are not going to spend billions to develop better hybrid cars, even though it would create jobs, because trucks and SUVs with low gas mileage are their most profitable models.

    However, what if the government raised fuel efficiency standards? What if trucks and SUV needed to get 20 mpg and cars required 35 mpg within 10 years? That would decrease our demand for foreign oil and create jobs.

    As for the impact of $50+ oil, sure it slows the economy. The airlines are getting crushed by it. The trucking companies impose a fuel surcharge to pass the cost on to their customers. Sucks for anybody who needs to transports goods.

    Will public outcry be enough to force change? I don’t think enough of the public cares to make a huge difference. There are many people that do, and that is why Toyota has a waiting list for the Prius.

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