Ammo Trader mocks the overall chatter of the Spike in Interest rates with this Big Picture perspective seen below.

The key takeaway is that while the bounce in the 10 year yield from 1.99% to 2.4% is enormous, it does not by itself signal the end of the 30 year Bond Bull market. There have been repeated spikes in interest rates of larger yields that have failed to derail the bull. Still, percentage wise off of very low levels, I’d be lying if I failed to admit a 20% move was impressive.

The wild card remains the Fed. I have spoken to many fund managers, economists, traders and strategists who simply have no way to gauge their current impact and ZIRP end game.

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click for larger chart

Source: Jerry Khachoyan

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UPDATE: March 21, 2012 9:42am

David Rosenberg sends along this chart of past interest spikes:

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click for larger version

Category: Fixed Income/Interest Rates, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “The Spike in Interest Rates”

  1. bda_guy says:

    A 20% increase in yield does not mean a 20% drop in price of the bonds though.

    If I had a 10 year bond with a 2% coupon, paid semi-annually, movement of the risk-free rate yield curve such that the 10 year duration increased from 2% to 2.4% decreases the price of the bond by just under 3.5%.

    Where things would start to get interesting is if the 10 year yield suddenly jumped to 4% from around current levels, producing an additional drop in the value of the bond of just over 10%.

  2. DDP says:

    Back on Aug 27, 2010 Tom McClellan posted a chart of high grade corp. bond yields dating back to 1768 that clearly shows a 60 year cycle in interest rates. If is wasn’t for the FED, interest rates would have started going up in the summer of 2010. But even the FED can not manipulate rates forever. The pressure of the rising long term cycle will overpower the FED and will push central banks to start raising rates way before the end of 2013. The link below will take you to one of the best long term interest rates charts available anywhere in the world.

    http://www.mcoscillator.com/learning_center/weekly_chart/60-year_cycle_in_interest_rates/

  3. Moss says:

    The spike is clearly all the PD Banksters anticipating the end of Operation Twist. The normal front running exhibited by the Crony System.

  4. dead hobo says:

    http://finance.yahoo.com/echarts?s=^TNX+Interactive#symbol=^tnx;range=5y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

    They’re absolutely right. This time is different. Rates on the 10 year will perpetually stay below 3.0% to 3.5% and never even think of rising back to those levels when the Fed program to buy down long term rates ends this June, nor when stocks recover in value. The inverse relationship between stock and bond prices is over and all finance texts will have to be rewritten. Interest rates will go negative in 2020, investors will pay interest to companies for the privilege of loaning them money (kind of like Greece today but without the CDO and default thingies.) US Taxes rates will eventually fall to zero and the income will be made up via negative rates on US debt.

    Actually, I thank them for their support. These people are also known as the wall of worry. Their financial illiteracy pays for my lifestyle. They won’t sell until prices for bonds bottom and they will likely buy into a rising equity market near the top. Thank you very much. It’s people like them who allow people like me to make a few extra bucks. When Europe crashes again in 2013 or 2014, I’ll try to get ahead of it and buy long term bonds because they will certainly rise in price due to the massive scare that will also arrive. Interest rates will perpetually stay low from that bond bubble, too. (ha ha)

    Riddle me this, bond nuts … If large capital gains were made by rising bond prices of late, how much further will rates fall and when will they start to fall to continue with the large capital gains? What will be the motivation for this collapse in the economy? (Time for vague reference to Japan or gold)

  5. not sure if I’m understanding this..”…many fund managers, economists, traders and strategists who simply have no way to gauge their current impact and ZIRP end game…”

    correctly, or not..

    though, to me, it sounds like a Felony.
    ~~

    but, certainly, this..”…the Fed and ZIRP…”, is, no?
    ~~

    O, Snap!

    “…Under the early Common Law, felonies were crimes involving moral turpitude, those which violated the moral standards of a community…”
    http://legal-dictionary.thefreedictionary.com/felony

    the ‘moral standards’ “loop-hole” ! I guess they’ll be O.K., then..

  6. techy says:

    If I had millions and I do not trust anything to preserve my capital, where do I put it. I think I will go with TIPS or maybe ten year bond. If all I care is to risk the least amount of money with minimum returns isnt this the right thing to do?

  7. techy says:

    Another thought: If Unemployment stays high and FED wants to keep 30 year below 4% and 10 year below 3%, I am not sure anybody can fight with them and win this battle?? Dont they have the power to supply unlimited sums at whatever rate they want to??

  8. theexpertisin says:

    Don’t fight the Fed.

  9. Sechel says:

    The Fed is so leveraged here, that its hard to see them pushing up rates anytime soon, especially in an election year where talk about Fed losses on it’s positions would be embarassing fodder. I expect they will be following and not leading the charge toward higher rates, when and if they come.

  10. VennData says:

    It’s hilarious to me how so many people think our nation is heading toward disaster in a unending spiral of debt, yet mock the mere mention that interest rates will go up…

    …high correlation with people who demand that tax rates are too high and must be cut so we can pay off the deficit.

    Innumeracy is alive and well

  11. DeDude says:

    Should this not be shown on a log scale?

  12. rktbrkr says:

    The Fed is so leveraged here, that its hard to see them pushing up rates anytime soon,

    I’ve heard a couple talking heads on Bloomberg radio say that it would only take a quick 1/2% jump in interest rates to effectively bankrupt the Fed.

    The Fed is in too deep to quit, I don’t care what their studies say about unwinding their position, they can’t do it without rocking the boat like a tsunami.

  13. AHodge says:

    looks ridiculous in a 30 year perspective.
    But there must be a bottom near here somewhare.
    also 40 bips at 2% is worth a lot more than at 5%
    so you could do De Dudes logs or show price instead
    or also
    not short yet

  14. [...] US need not panic at the first sign of a tick up in interest rates.  (Free exchange, CBP, Big Picture, FT [...]

  15. Sasquatch says:

    The 1 Year Treasury rate has moved from 0.125 to 0.22 in a short period of time. It is acting like it did in April 2004 when the rates started rising.

  16. streeteye says:

    lot of refunding going on, better economic outlook. seems like a good news credit demand driven pop, not an inflation vigilante buyer’s strike

    http://blogs.ft.com/gavyndavies/2012/03/18/a-healthy-rise-in-global-bond-yields/

    and if the economy goes south, in the immortal words of Chubby Checker… let’s twist again -

    http://www.youtube.com/watch?v=VjQwfkQj6e4

  17. socaljoe says:

    Interesting chart.

    If this “enormous spike” of 40 BPS is getting so much attention, then what happens if rates go back to the top of the downward sloping channel… say 3.5%, where they were only last year?

    What happens to mortgage rates, home prices, and the housing “recovery”?

    Would the FED be (theoretically) insolvent?

    What happens if rates break out of the 25 year downward sloping channel?

    Surely one day they will.

    Other than the FED, will there be any buyers of treasuries if the 25 year trend is broken?

    Are we looking at serial QE’s to buy the $1 trillion/year flood of new treasury issuance, in an effort to contain rates?

  18. VennData says:

    On CNBC Rick Santorum… er… a.. Santelli merrily pointed out the drop in rates today.

    He thinks rates are headed lower, much lower.

  19. nofoulsontheplayground says:

    Using a semi-log chart rather than a linear chart would better illustrate the magnitude of the various interest rate spikes on the 10-year T-bill.

  20. TheArmoTrader says:

    Hey Barry, just wanted to say thanks for highlighting my post/chart.
    The reason why the yield spike looks so big (on a short term time frame) is cuz in the previous months yields were dead. The range was so small/nonvolatile. Thus this “spike” looks so huge.

    (Ps: Not sure if “Ammo Trader” is a typo or if I’m not getting something? lol)

    Thanks

  21. yieldcurver says:

    Barry,

    This guy hopes the spikes in yields continue, since they are harbinger of improved economic conditions:
    http://macromarketmusings.blogspot.com/2012/03/dont-worry-be-happy-treasury-yield.html