[Editor's Note: The following post is by TDV Managing Editor, Redmond Weissenberger]
There was a slight hiccup in the US bond market recently. The yield on 10-year Treasury bonds rose 11 basis points, going from 2.712% to 2.82%. The jump, while relatively small, is demonstrative of much bigger implications for the overall economy.
The news brought a flurry of excitement from the talking heads on financial television. After years of suppressed interest rates – courtesy of Ben Bernanke’s Federal Reserve – it looked like we would finally be seeing some action. So what actually went down?
It turns out that foreign investors dumped $66 billion in US government debt in June. Likewise, one hedge fund sold off almost as much in treasuries. Why the big sell? It can’t be known for sure, but it may be that Bernanke’s magic is slowly running dry and Uncle Sam’s knees may finally be shaking under his massive $17 trillion debt.
The market is an incredibly complex process, with billions of individuals acting to influence prices across the world. Still, the slight slump in Treasury prices shows that the Fed is not invincible to market forces. Since 2007, the market has been manipulated by central banks attempting to keep interest rates lower than the natural rate. The newly created money has rushed into the financial sector, boosting asset prices and perpetuating the facade of prosperity. When the stock market is roaring, Bernanke is more than happy to claim credit. But this credit-fueled recovery can’t last forever and we may be seeing the first spurts of water come through the cracks.
As economist Joe Salerno notes, “Once confidence vanishes that the Fed is able to maintain its inflationary QE and zero interest-rate policies, the jig will be up.” There is a lot of talk about the Fed slowly ending its bond and mortgage-backed security purchases this year. That development remains to be seen, but we should welcome the day when Bernanke’s phony recovery is unmasked for what it is. That will be when the market trumps government intervention and proves that central planning always fails.
Editor's Note: This article is excerpted from the August Issue of TDV. To read more engaging and informative pieces like this, please subscribe here.
