"Benchmark US yield curve hits fresh record wide
If thought 275bp for the 2Y-10Y curve was wide, Reuters reports the curve hit a fresh record on Tuesday:
15:55 02Jun2009 RTRS-US 2-YR, 10-YR YIELD GAP HITS RECORD WIDE AT 277 BPS IN THE WAKE OF STRONGER-THAN-EXPECTED HOME DATA
“We would only consider buying Treasuries if 10-year yields come to around 4 percent,” said Shuhei Mochizuki, assistant manager in the foreign-bond section in Tokyo at Sumitomo Life Insurance Co., which oversees about $30.7 billion in non-Japanese debt. “We prefer European bonds for now.”
This is what we want. Here's how it works:
From my point of view, this is how you want QE to work against Debt-Deflation, which is a panic phenomenon.
1) Low Short Term Interest Rates, as a disincentive to buy guaranteed assets, and an incentive to buy stocks and corporate bonds. This attacks the Fear and Aversion to Risk.
2) Rising Longer Term Interest Rates, which signal an end to Deflationary Fears, and are an incentive for Longer Term Investing.As well, as you say, the Spread often ( which is as exact as this gets ) signals a recovery.
Now, what's interesting, is that I take it that this is what Bernanke and Geithner have been arguing, although not necessarily saying it the way I do. And, in fact, it seems to be working, which , again, is about as good as it gets, since none of us know the future.
Yet, as obvious as this is to me, others have been puzzled by this line of reasoning. I, on the other hand, do not understand the point of having interest rates move in tandem, insofar as incentives are concerned.
I understand the idea of rising interest rates being a problem, but the Fed has other means of addressing mortgages, in coordination with other parts of the government. However, I am not for keeping interest rates of mortgages artificially low at all, but certainly feel that this policy should now end. We need to see a plausible bottom on housing prices, without the perception of government still keeping housing prices artificially high.
Of course, Inflation will be the issue going forward, but I prefer that to a Debt-Deflationary Spiral. Call me silly, I guess.
Right now, a stimulus with QE is working as Geithner and Bernanke and I would like. It could all go sideways, but the fact that this is the plan seems to be missed by many people."