Try, try as the Government may but they cannot keep a lid on long term interest rates. This week the long term mortgage bond yield climbed for a fourth straight day. The yields on Fannie Mae and Freddie Mac 30-year mortgage bonds rose to 4.3 percent from 3.94 percent (an increase of 36 basis points) as the Federal Government continues to shovel cash into the system like coal feeding the fire of the runaway locomotive in an attempt to drive down loan rates in order to ‘stimulate’ consumers and stem housing declines.

What seems to be escaping everyone’s eye, except until recently, is that as the Fed has “come to the rescue” in their purchasing of treasury’s and notes the long term yields have increased and thereby driven down bond prices. So what does this mean? Well, basically, it means that long term interest rates are going up. In very basic terms, it will cost more to finance money for a longer period of time.

As this has been occurring, ETF’s like TBT have been increasing (TBT is an inverse ETF to long term bond prices). This is indicative of a fatal flaw in the Fed’s management of this recession – they’re pumping the patient full of drugs today in order to “stop the bleeding” but they’re not thinking about the long term impact on the patient’s health.

What I’m saying is that short term fixes will not yield long term results; not if long term yields keep increasing thereby setting the stage for inflation. With so much money entering the system the Government thinks that it’s “stimulus” is working. Why wouldn’t they think that? The DOW, along with other major averages are up on a percentage basis (DOW up 11.9% since the stimulus bill was signed) and have provided support behind all the bulls calling an end to the recession.

Premature celebration typically leads to inevitable disappointment. This is a basic supply/demand problem – too much money supply chasing too few goods (remember as the recession deepened and capacity declined there has been less supply of goods and services) will lead to higher prices (welcome back inflation!).

What some economists have suggested is that with long term yields on bonds rising, and the increase in the money supply courtesy of Timmy & the Boy’s we have no where to go but an inflationary economic environment. There are several outcomes to this scenario which may result in anything from a forced secondary recession to curb the inflation (which would be like taking two steps back) to an insane increase in interest rates.

Higher interest rates are likely, which, coupled with a decline in income due to unemployment will lead to a situation whereby consumer financing will be nearly impossible to obtain and in the alternative be so expensive, who would want to finance anything? Cash will be king as many lending institutions will be unable to finance consumers both from a credit standpoint due to stricter lending criteria and a resistance by borrowers to higher interest rates.

If you believe my aforementioned opinion then short long term bond prices and while the rates are low borrow as much money as your income level can tolerate!

Sound Off:
Do you think the Federal Government’s spending program will flood the markets with too much cash? Do you think long term interest rates will increase as a result?