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Thursday, June 30, 2011
Interest rates skyrocketing
I suggested in a recent blog that the bond market didn't believe that the government would default on Aug 2. I also suggested that the stock market would possibly return close to its recent high.
The S&P 500 is up from 1261 on June 15 to 1320 as of the time this blog was written. I still think that the S&P 500 will get somewhere between 1360 and 1370 before the end of August. Of greater importance is the fact that in the same period of time the stock market was advancing the yield on the 10-year T-Bond has moved from 2.86% to 3.17%.
As you can see the yield on the 30-year has moved to 4.42%. If bond investors are beginning to focus on the deficit debate in DC I can see why they might be worried. Clearly the President rhetoric last night doesn't seem to offer any cooperation from the White House. The White House seems to think we need $400 billion in new taxes over the next 10 years to solve the problem. If the yield on the 30-year T-Bond gets past 4.75% the equity market could be in trouble perhaps sooner than I thought.
Below is the chart on the hedge we have been using the TBT which is a short of the long-term bond market. The TBT price action is the exact opposite of the bond market. When bond prices rise the value of TBT falls as interest rate rise and bond prices fall the value of TBT increases. The chart shows the dramatic rise in interest rates in the last 2 weeks affect on the price of the TBT. Watch the debate on the debt ceiling that will give you the direction on interest rates and the market.