Is the Ten-Year going to 3%?

Bruce Krasting's picture

Is the Ten-Year going to 3%?

Courtesy of Bruce Krasting

These two articles point in a bad direction:




China’s 2011 total trade surplus was $183B. The surplus with the USA was $270B; the US was 150% of China’s total surplus. China imports lots of “stuff.” Crude oil is high on that list. Increased domestic consumption, plus additional imports for strategic storage, have pushed up imports to 6 million barrels per day in February. At that rate, the 2012 import bill for crude will be $250B, approximately equal to the US trade deficit with China.


The US/China trade deficit is creating USD surpluses for China’s largest crude suppliers, Saudi Arabia. Angola and Iran are the largest providers. These countries are not America’s friends, and they already have too many dollars. When Americans shop at Wal-Mart, they are actually sending dollars to Iran. In 2012, it will come to about $25B of “our” money that ends up with the Ayatollahs. Welcome to the global village.


As a result of the shrinking trade surplus and the need to import expensive crude, China does not have the investable dollars it once had. So it is no longer buying US Treasuries at the previous fast pace.

At the same time, the US Treasury is issuing debt at the rate of $100B a month. If the Chinese aren’t buying debt, then it must be sold to other dollar holders.


Saudi Arabia may end up with more dollars in reserves as a result, but I don’t think it will buy long-term bonds with this money. The money will stay in short-term securities. The Saudis will look at the 0.5% they can get on their money for 3-years (or the 5-year at 1%) and just say “no.”


Let's return to the Bloomberg story and the seven-fold increase in bank holdings of Treasury paper:


Commercial lenders purchased $78.2 billion of Treasuries and securities of agencies in January and February, compared with $62.6 billion in all of 2011, bringing their holdings to $1.78 trillion, Fed data show.


It is a financial “unnatural act” when an A- rated bank can extend credit to a AA+ borrower and still make money in the process. This reverse credit arbitrage is made possible by the banks' willingness to "borrow short and lend long." The banks are doing it today because they have unlimited quantities of liquidity available to them through the repo markets at near zero cost. They are playing the carry trade. In the process, they are loading up their balance sheets with low yielding assets, and they are taking risks of rising rates. There is a limit to this.

As of this morning, many of those US financials that own the $1.8T of bonds are not so happy. The strong stock market, better economy and rising inflation expectations have clobbered the bonds the past few days. Some may think that the ten-year at 2.20% is a “buy”. But all I see in this chart is the “air” under the current price.



Not surprisingly, inflation expectations have picked up:



The easy answer to this conundrum is that the Fed will just keep buying more bonds to keep rates artificially low. I say it can’t do that. If the Fed announced tomorrow that it was going to “TWIST” the market to keep the ten-year at 2%, crude would rise to $150 in a month. Bernanke understands that.

Absent a new move by the Fed to contain long-term interest rates, the ten-year looks like it is headed to 3%. The Chinese are not buying, the banks are full up with paper (and underwater), PIMCO et al are long duration up the wazoo, and any thought that retail interest in five-year bonds at 1% will save the day is just misguided (dumb money is not that dumb).

Bernanke must be delighted today. His strategy all along has been to inflate the S&P and let rising asset values stimulate economic growth. His unlimited supply of cheap money has worked. But it has stoked inflation and that is now being transmitted to the bond market.

I think something has to give, either stocks back off and the economy cools, or the ten-year is headed to 3%. Bernanke can’t have it both ways. He’s about to learn that lesson.



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jomama's picture

. ( i really wish ZH let me post ascii characters)

Money 4 Nothing's picture
Is the Ten-Year going to 3%?

Answer.. Yes, thanks Bruce for your due diligence. Like I have said before, Passports or stand and deliver or wake up one morning on private property. It's for all the chips. We are Greece, just faster printers. 

Precious's picture

Be aware foolish Americano's.

Foreign dollar holders will soon own part or all of your very home, through a real property lien, right after your local city council declares bankruptcy for failure to meet pension obligations.

That's the way it's gonna work in your shire.

You still worried about gay marriage, climate change and healthcare benefits?  Stop worrying.  With Dumb and Dumber at the fed and the white house, you're going to be scavenging for food much sooner than you realize.

AnAnonymous's picture

Made me laugh.

Be aware? Of what? Of their own history?

Through real property lien? What is that? Same stuff as when the SCotUS told that Indians had an unalienable right on their ancestors' land?

Foreign dollar holders, especially all those US citizens, are perfectly aware of what they own in the US of A.

AldousHuxley's picture

Dumbass Americans think they are #1 when the owners are Chinese, Japanese, Arabs, Russian, etc.

They have gay marriage in shit hole high tax overprices real estate markets like new york city because that's the only way to attract more population. Sane normal family oriented white males already left manhattan after they got it out of their system and saw how miserable people were at the top of the pyramid.


Scavenging for food....already here and it's called FREEGAN


Soldiers are voting in for a political candidate against war.

Goldman bankers are resigning

Unemployed are chanting outside the Fed

3rd world is asking 1st world for their gold back

Idiot from Texas became the president and idiot white trash from Alaska ran for VP.


Look around fellas. Smart young Americans are leaving the sinking ship.


Yancey Ward's picture

Of course, Bernanke could just announce the short term rate will last out until 2017.  He isn't done yet.

dcb's picture

I disagree often with your bruce, but good post.

malek's picture

Don't worry, Bernanke can and will pour more "gas", and after inflation shoots higher they will find a scapegoat (Iran?)

sitenine's picture

One needs to consider what happens when the 10 year hits 3%.  Were will the 30 year be (especially considering the Fed believes the curve is already too flat)?  If mortgage rates start rising precipitously, there will be even less of a housing market than we have now.  I haven't heard much in the way of housing market news lately, but we may see the subject coming back up in conversation with a vengeance..

[update] I'm not sure how accurate of a gauge MW is on the Home 30-year fixed rate, but they indicate that it moved from 3.8% to 4.0% over nite.

alexwest's picture

nice format of article..

thanks Bruce


Greenhead's picture

Why couldn't the regs be adjusted to allow the banks to call the bonds they buy "debt" and then go to the Fed for the reserves needed to support this new debt?  That way the Fed's balance sheet could be much, much smaller and still support the spend/defict of the fedgov?  Couldn't that significantly minimize what would otherwise be a big Fed balance sheet explosion?

the grateful unemployed's picture

ultimately when the Fed runs out of options it goes to UST and institutes price controls on treasuries. by the time that bridge is crossed things are so bad that price controls seem like a good thing. and people are so used to the 90% control that the Fed has, that the other 10% seems like well, Czeckslovkia, after Poland and France.

Tuffmug's picture

The BOND MARKET is not a true Market! It is a storage area designed to steal your wealth. You and I are trapped in the Looking Glass. There is only the FED or some other CB stealing whatever accumulated wealth you are dumb enough to maintain in their fiat money system! Financial repression works and interest rates will be at whatever level the Fed wants them to be. Short treasuries at your peril. Ask the poor dumb bastards who've been trying to short the Japanese bond market for twenty years how that's gone for them.

Yancey Ward's picture

Agreed.  Japan is the object lesson.  I doubt the Fed is any less powerful than the BOJ.

Orly's picture

"The easy answer to this conundrum is that the Fed will just keep buying more bonds to keep rates artificially low. I say it can’t do that."

I can't recall hearing someone say that the Fed even could hit the wall with ZIRP but also call the time when the unstoppable force meets the immovable object.  Seems like now, something's gotta give.  Today, treasury yields tose dramatically, so that must mean that therre is a slush of US bonds on the market, leading to lower prices...which means that interest rates are going up.

Are you saying that the Fed is in a Kobayashi Maru scenario and that nothing they can do from here on out would be "right;"  they can only choose options that are less wrong than others?

Not reassuring.


the grateful unemployed's picture

and you think the Feds can't change the rules?

Orly's picture

Ben Bernanke ain't no JT Kirk.

Yancey Ward's picture

I will take the other end of Krasting's "This or that".  The economy starts to slow again, the Fed gets another twist or another explicit QEIII, and the 10Y revisits the lows.

Yancey Ward's picture

Twist is running out of short term securities.  This is the reason the plan was floated the other day about buying more long term securities and then borrowing the proceeds by issuing Fed short term securties.  It is all a shell game.

DeadFred's picture

This sell off can only go on a day or so more before things get scary. If people get spooked and start dumping treasuries the Fed will have to backstop the debt with purchases. I suspect there is more involved than simple finances. I commented the other day as TLT slid under support, it was right about the time Obama decided to file trade charges against China. If this sell off has hostility at its root it won't be easy to stop.

CrashisOptimistic's picture

I think it's political.

A Treasury ramp up in yield will drive the dollar up.  That can't overwhelm oil scarcity, but it CAN moderate the price in a temporary way, and there is nothing Obama's campaign needs now more than lower oil.  A higher dollar lowers the price of items priced in dollars.  Namely oil.

lasvegaspersona's picture

What we know here,  a lot of the big guys know even if they publicly say we are a bunch of contrarian loonies. When confidence goes it can go very quickly. When the prisoners start to betray one another the first gets the best treatment. 

translation: when the shit hits the fan it will destroy the fan and everything near it. It will not be just a shit shower.

mind_imminst's picture

The FED will print and buy bonds. Maybe in secret, maybe QE3, but it will happen. Don't get caught shorting bonds for too long. THE FED WILL BUY BONDS AND KEEP YIELDS LOW! The FED will crush the shorts. This will of course cause other negative effects in the economy, middle class, pensioners, etc... Things will get out of control, various bubbles will burst, but the FED will not allow bond yields to rise very far.

Non Passaran's picture

They might not even need to do that if TSHTF in Europe which shouldn't be more than few weeks from now.
TBT looks good but I doubt that'll last.

moonshadow's picture

plus...the stock markets of the western world have had a strong run for the last few months and it's time for a breather (at least). when that happens the dollar and long bonds will again be the 'safe haven'. however, it's only a matter of time b4 the world acknowledges our fiscal weakness and those two events no longer happen in tandem. that 'air' is still there and won't keep supporting

lasvegaspersona's picture

Would everyone on the site please send me a promissory note for $10,000,000. You must state at the bottom that you are 'good for it for sure'...those exact words. I know this guy who will then give me cash to spend now if I can get a few billion of these notes to use as 'collateral'....what? I have to 'know someone' to get that deal? Thats not fair...

sIewie the pi-rat's picture

 by the time  Hanukkah rolls around we'll be looking at

a ten year approaching three perecent

job numbers >300k with reported percent <7.5%

resale housing inventories at multi year lows

Obama re-elected in landslide and the dual Morman ticket Romney/Rubio (who knew?) crashes

inflation as the economic headline




i-dog's picture

Nice to see you lucid ... if only for a fleeting moment... :)

Rynak's picture

Bruce - again an exceptional article by you - but there is something which you do not address:

The budget deficit of the USA. I guess you agree that in the near-term, this will not be fixed, right? If not, then how can it be (short-term) sustained, if not via more monetization?

And: Printing money for the gov to SPEND, isn't exactly "sterile"... it is printed cash guaranteed to go into circulation.

Sooo, even excluding bank bailouts and similiar stuff, how is the fed supposed to avoid further sharp inflation, if it has to print for the gov to spend?

steve from virginia's picture


A lot to chew on in this article:

 - Chinese need cash dollars so they are selling what they have to sell (other than poison dog food). Still, @ 3% the 10 year yield is historically low.

 - A 2% Fed Funds Rate would be the end of the world. Yes, there would be inflation (but not for long). Valley of the shadow of Death: we would be in it.

 - China needs dollars to buy crude (and its underground economy is flush w/ dollars to buy crude). Inflation in China as a consequence (along w/ dollar-yuan arbitrage).

 - Banks buy Treasuries from the ...? Why not: there is the discount window then there is the discount window in drag (repo market). Borrow short, lend long, leverage up as much as possible on 'basis trades' and hope for the best. Does all of this sound familiar?

Maybe the next time this farcical nonsense blows up Goldman Sachs will actually go out of business.

 - Look for interest rate swaps as noted by BIS to balloon. Shorting Treasury futures w/ derivatives has been a solid strategy for the Fed/primary dealers to push down on the longer end. Now?

 - One more time, (I'm sure everyone is bored w/ it): get rid of the cars: ALL of them, NOW! Santa Claus is going to take the goddamned cars and is going to shove them so far up your asses they will come out of your ears.

Ask the Greeks.


andrewp111's picture

Wait a minute. China does NOT need dollars to buy oil if they buy the oil from Iran. They can buy from Iran in RMB.  (Iran doesn't take dollars.) China can (and probably is) cashing in its T-bills to buy oil from elsewhere, and stashing that oil in their version of a Strategic Petroleum Reserve. Iran supplies much of their current usage.

moneymutt's picture

Am I missing something, this mean the FED will now monetize the debt and rather than payin 1 percent interest on it, we will pay no interest (well almost none, as FED will pay back interest they collect minus an admin fee). We can argue whether the increasing debt will be inflationary at this rate of printing, but that would happen whether we sold the debt to China and then spent it or whether we sold the debt to the FED and then spent it, debt is money.

A zero percent loan without interest is free money. The more debt FED owns, it becomes interest free debt. And unlike China, we can just stiff the FED for the debt without creating any international incident. What is the FED going to say, we owe them the money? when in fact the FED created the money out of thin air by digitally printing it under our authority that we gave them to issue currency...

Right now we live under all the inflationary consequences of creating money via taking on debt from pensions, China, big banks, whomever, but we also have to pay the interest to these parties. As FED monetizes, we incur the same level of inflationary pressures, new money in the system is the same, but we do not have to pay the interest cost.

Viva China not buying dollars, let the FED monetize away.

Quantum Nucleonics's picture

China, or whoever, buying Treasuries, doesn't expand the money supply (well, that's not entirely true, but let's keep it simple).  China has a dollar in their pocket, they give it to the US in exchange for a treasury note, US spends that dollar on whatever.  No innocent paper was harmed.  The Fed starts with no money in their pocket.  They press the print button, then put the money in their pocket, trade the dollar for a treasury note.  Poof, money supply was expanded.

The Fed monetizing the debt is in essense stealing from everyone that already holds US dollars and/or receives their income in US dollars.  Better to sell treasuries to the Chinese, or whoever, take their cash, and shank them for a big haircut when the time comes.

Hedgetard55's picture


Amazes me how many tools can't grasp what you just said.

LawsofPhysics's picture

So many contradictions Bruce.  Rock, meet hard place.  Oil will go to $150 regardless.  Lots of dollars coming home to roost, and not in a good way.

barliman's picture



Q2 willl once again be the depature point for the rest of the year. More and more of the people I am talking to are focused on the current real world inflation and their perception of Washington's intent to massively devalue the dollar.

Back in the '70's the unions negotiated automatic wage increases based on inflation - it was an innovative way to try to "beggar their neighbors" who didn't have union contracts. It did not work out very well for anyone.

Ben's "beggar thy neighbor" approach depends upon the willingness of "our neighbors" to not only let themselves be beggared but to loan us their cash so we can keep the process going ...

I think inflation has already slipped out of Ben's  "2% leash" and the markets are being forced to react. This would fit in nicely with the corporate bond issuance as well. If you are going to borrow/raise money, the time and ability to do so at a reasonable cost is coming to an end.

If BeErnanke is going to QE3 on Treasuries, he has about 76 days left to do it.  If he doesn't get the banks out from under the $ 1.8 trillion cloud, the ten year could be at 5% by October.

Question for you, Bruce:  If (and I agree it is not a sure thing) Bernanke does announce QE3 as another purchase of Treasuries program HOW BIG will it have to be and, if you would, HOW LONG of a time frame does he try to spread it over???


Bruce Krasting's picture

No less than Morgan Stanley said the other day that QE3 something is coming in June. This would be an extension of Operation Twist. The Fed would do it in "sterilized" form.

Depending on the size ($500b?) it would keep the ten year cheap. But it would dry up the hot money on the short end. So in a way, it is a drain.That is how the market will read it.


I disagree with Morgan Stanley. I say the Fed sits tight through the election.There is nothing to be gained from more stimulus right now. You would see it at the pump in less than a month.

barliman's picture



I think Operation Twist is like ZIRP. Once you've walked through that door, it locks behind you and you have to keep Operation Twist going "for a sustained period of time".

My view is that the price of oil is currently being used as a lever on Obama. The Saudis and the the rest of the Arabic Middle Eastern states want the Iran problem addressed NOW - not after the American election.

"Supply" or "production" or other problems can be brought forward as excuses WHY the price of oil suddenly snaps higher (WTI @ $ 110, $ 120, $ 130 ...) but the lever has its greatest impact NOW because if the price keeps going up, Obama goes down in flames - and will drag under any Democrats who stand with him.

I am hoping your prediction is correct ... but I don't have much hope.


TruthInSunshine's picture

Barliman, if I read your comment correctly, you are implying The Bernank is prepared to take the Fed's balance sheet to close to 5 trillion dollars, just rescuing banks form their USTs, all in the next year or less, excluding any additional amounts resulting from LSAP - and NOT including additional monetizing going forward?


I think not, brother barliman.

barliman's picture


Well ...

I don't want him to do it. I think, you don't want him to do it. But in the end he is the ChairSatan and has that whole "fallen angel trying to be God" thing going.

If he doesn't soak up more Treasuries and the curve gets away from him ... we are at game over shortly thereafter, wouldn't you agree?

How long does he take if he goes down that road?  I am thinking 18 months (and he still would not pass ZIRP) but I was looking for BK's take on it.

I think LSAP's are too toxic unless Obambi is re-elected. I believe Bernanke is willing to take the Fed's balance sheet up to $ 5 trillion.

It would be a HUGE mistake but he doesn't have the guts or the brains to make the counterplay; start selling off the "assets" and break the banks.

How do you see him moving forward?




TruthInSunshine's picture

I wasn't efficient in what I had intended to express.

I do not believe the Federal Reserve is going to expand its balance sheet to 5 trillion USD just soaking up tnotes that banks already own and are sitting on, when doing so merely undercuts whatever will (and capacity in terms of not igniting inflation far worse) the Fed has to monetize what will be massive deficits going forward, let alone doing any LSAP when the double dipper comes in MBS as the foreclosure pipe opens back up and depresses real property prices again.

If the Fed did all 3 of these things their balance sheet would get way beyond 6.5, then 8 trillion, in a matter of two years, at the most (the Federal Gov't is running a current deficit of 44%, or approximately 1.7 to 1.9 trillion annually).

Strerilized QE and Twist don't really expand the Fed's balance sheet, since they're liquidating current assets to buy assets.

Either one has to believe the walls have somewhat closed in on Bernanke, or that there really will be (no exaggeration) an end game finale.

If the fed has a balance sheet that grows from 350 billion or so in 2007 to 5, 6 or 7 trillion, I just can't see how that doesn't usher in some very bad consequences.

barliman's picture


We are in overall agreement.

I agree with your points regarding deficits, real property prices and the outcome of an ever expanding Fed balance sheet.

I am less comfortable with the "sterilized" idea. I think it works well, once. Going back to that same approach multiple times will result in diminishing and, eventually, negative returns.

TLC has a program "Tsunami: Tales of Terror" I was watching tonight. Bernanke reminds me of the people who just stood, rooted to one spot, watching the wall of water coming towards them.

As much as we despise him, he is an intelligent man. I think he believed the politicians would address the budget defecits and now that he sees the wall of debt coming towards him, he knows he is trapped in a dead end of his own creation.

My view is we had one chance to address the problem but letting bad things run their course in 2008. Everything done to try to forestall the bad things we could have survived (another Great Depression) have resulted in making the problems bigger and impossible to solve to where we now face a global  economic collapse and many worse consequences.


Sudden Debt's picture

We've been talking about endgames for years, but it's slowly creeping closer and closer.
It's not for the next 2 years but damn it's getting close...
And it scares the hell out of me...

q99x2's picture

I read Endgame 25 years ago and I'm still waiting for someone to tell me what those two things were.

i-dog's picture


"I read Endgame 25 years ago"

Good for you. Then you are very well prepared and won't be affected at all financially by its sudden arrival. Others won't be so lucky.

Winston Churchill's picture

Be scared.

Two year is the maximum this corpse can keep walking.

Mathematicaly certain then.

There are plenty of things we know about that could make it happen at

any time before then.

Then there's the things we do not know about..............

michael.suede's picture

"Bernanke must be delighted today. His strategy all along has been to inflate the S&P and let rising asset values stimulate economic growth. His unlimited supply of cheap money has worked. But it has stoked inflation and that is now being transmitted to the bond market."


I disagree with stimulating econmic growth.  Inflation does not mean the economy is growing.  The rising equity and commodity prices are strictly because of money printing.  Rising prices != economic growth.

whatsinaname's picture

I think something has to give, either stocks back off and the economy cools  -----

stocks = economy ?

the grateful unemployed's picture

should we buy the ten year at 3%