Interest Rates are up as the 10 year rises

Good Afternoon!

In case you haven't noticed, interest rates are rising again! The poor housing market just can't catch a break. We are now up to 6.3% on a 30 year mortgage according to bankrate. Rates on average were at 6.13% last week.

I have been talking a lot about the 10 year treasury note recently. I focus on this because most mortgages rates are set based on the 10 year yield. Well guess what folks, the 10 year yield is shooting to the moon again after falling earlier in the week as money flew back into the stock market.

As I have explained before, the 1o year yield must rise when people move out of treasuries in order to make them more attractive to potential buyers. When this yield rises, so does mortgage rates.

Treasuries are considered a "safe haven" because its gauranteed by the government. As a result, when the market sucks, people run to treasuries which drops the yields on treasuries because there is a lot of demand.

When the market moved higher late last week, yields on treasuries rose because people moved out of the "safe haven" and back into stocks. This then forced up mortgage rates. However, there is another scenario as to why yields rose.


The "Black Cloud" continues to hover

The explanation that I gave above is how the pigmen would prefer to explain the rise in treasury yields. There is another scenario as to why the 10 year rose last week. Remember the "black cloud " of $5 trillion in Fannie/Freddie mortgage debt that I talked about this last week?

Well its still there guys! The government still doesn't know what to do with it. Freddie announced on Friday they plan to sell more shares in order to raise capital. This will result in more dilution of their stock. I am sure Freddie investor's are thrilled about that! Yeah right.

What could be happening here is the 10 year may be rising because treasury investors see that "black cloud" and have decided that they don't want to own as much of our debt in the form of treasuries.

Remember, the biggest treasury investors are countries like Russia, the middle eastern countries, China, and India.

As our debt bubble bursts, maybe they are beginning to worry that our government may decide to take over this $5 trillion dollar liability in order to stave off the inevitable collapse of this "bubble debt".

Now of course this $5 trillion dollars has value because houses are not worth nothing. However, this $5 trillion would double the debt load of the United States and the default rates on this "black cloud" continue to soar. Maybe China and other countries are beginning to think the "safe haven" of treasuries doesn't seem so safe anymore.

If the world decides to pull back on buying treasuries, interest rates on the 10 year would soar in order to make them more attractive to investors. Housing would then collapse. This would most likely be the pin that pops the debt bubble.

Here is the story from Bloomberg on the 10 year:

"July 19 (Bloomberg) -- Treasuries declined, pushing yields on 10-year notes up the most in a month, as concern diminished that credit-market losses will worsen reduced the haven appeal of government debt.

The yield on the benchmark note finished the week at 4.08 percent, the highest closing level since June 25. Bonds had initially rallied as stocks fell on concern that U.S. banking- system turmoil may be worsening after Treasury and Federal Reserve officials proposed a plan to shore up mortgage-lenders Fannie Mae and Freddie Mac.

Rising mortgage-bond rates may also have prompted investors to sell government debt as a hedge, said David Ader, head of U.S. government bond strategy at RBS Greenwich Capital in Greenwich, Connecticut, another primary dealer.

``The 10-year plus sector is reacting to the mortgage market,'' Ader said.

Yields on 30-year mortgage bonds guaranteed by Fannie Mae touched 6.17 percent, the highest since Aug. 16, 2007. Yesterday they were 2.06 percentage points more than yields on 10-year Treasuries, the biggest spread since March 11.

Treasuries also fell amid speculation the European Central Bank is considering another increase in its benchmark rate to combat continued inflation, after raising it on July 3 by a quarter-percentage point to 4.25 percent."

Final Take:

More time is needed to see if this rise on the 10 year is a trend. As you can see above, the ECB is talking about another rate increase. This will put more pressure on the Fed to raise rates. This also puts more pressure on the dollar.

If the Fed doesn't raise rates soon, the bond market will do it for them.

Bottom Line:

The $5 trillion "black cloud" eventually has to be dealt with. The bond market may take rates to the moon if it doesn't like what the Fed decides to with it.

The rise in the 10 year tells me the bond market is signaling that they have had enough of the games on Wall St.