Major Sell-off In Bonds and North Korea Verbal Spanking (Not)

But First An Update On The North Korea Crisis From Hillary Clinton

As I had surmised, the Obama administration's answer to the crisis of a madman firing missiles and setting off nuclear tests is as expected: reliance on trying to get the madman to a negotiating table so that he can agree to terms he has no intention of abiding by and some more of those tough U.N. resolutions and sanctions. Read:



(Fox)"North Korea will have to pay a price for its aggressive actions, Secretary of State Hillary Clinton said Wednesday, and she urged Pyongyang to return to the six-party talks that it abandoned in favor of nuclear weapons.

"North Korea has made a choice, chosen to violate the specific language of the U.N. Security Council (Resolution) 1718. It has ignored the international community, abrogated the six-party talks and continues to act in a provocative and belligerent manner," Clinton said during remarks with Egyptian Foreign Minister Aboul Gheit.

"In the United Nations, as we speak, discussions are going on as to the consequences that North Korea will face coming out of the latest behavior, trying to rein in the North Koreans and get them back into a framework they have chosen where they fulfill their obligations," she said..."

Pyongyang must be quaking with fear. As I have said many times before these are hopefully Obama's words for public consumption with covert action behind the scenes. This leader is a grave danger to the entire world, and mere table talk will unfortunately be an utter failure.

What Does A Steep Yield Curve Mean...If Anything In This Case

When I was a bond analyst for a sell side firm out of business school, a steep yield curve was a way to get retail investors into long bonds which in turn translated into more revenue for the firm. That is because the "spread", or the amount that a firm can make, is typically greater the further out on the maturity spectrum that you go. Back then for the purposes of Wall Street the steep yield curve proved to be a great marketing ploy.



What Is This Steepness I Speak Of?

The steepness of a yield curve is the difference in yield between short-term bonds like the two year, and longer-term bonds like the 10 year. The yield of the 10 year treasury is currently 3.66%, and the yield of the treasury 2 year is .92% for a difference of 274 basis points which is close to record steepness.

Typically, a yield curve will steepen when the Fed lowers short term interest rates (it has no control over long rates other than open market operations)to stimulate the economy, and investors in fixed rate securities such as treasury bonds sell to move into the stock market, pushing yields up.

Is This Time Different?

In this case, could the rise in long term rates signify something other than economic expansion? Could it be inflation fears fueled by the amount of stimulus that has been injected into the economy? Could it be a normal adjustment in the level of rates due to that age old concept of supply and demand?

The federal government will be borrowing in the neighborhood of $2 trillion (with a t)in 2009, and the foreign governments that are providing this liquidity definitely have something to say about where rates will go from here.

China is the single largest foreign owner of treasuries, and without it's participation in new auctions, or worse yet if they decided to be sellers, yields will rise significantly.

What if the "green shoots" as the pundits on T.V. love to call them are really stink weeds, and the economy is not beginning to come out of recession? What will the trillions of dollars of stimulus money injected by the government chasing too few goods do to the level of interest rates due to spiking inflation?

We can only hope that President Obama and his band of merry men led by Tim Geithner and Ben Bernanke have some semblance of a clue as to what it is that they are doing. God help us if they do not! Sphere: Related Content