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The True Message of the Bond Market

Written By: Michael Pento  |  Posted: Saturday, July 23rd, 2011

                Isn't it remarkable how complacent bond market investors are about the chances of a default on U.S. debt. In fact, there are many reasons why the yield on the Ten year note should be trading at yields much higher than what we see today, over and above the specter of Congress failing to raise the debt ceiling.

                First off there is inflation. Official government data from the Labor Department has year over year consumer inflation rising at 3.4%. With the Ten year note offering a paltry 3.1%, negative real interest rates now extend out over a decade! That is clearly an unsustainable condition. Why aren't bond investors more concerned about inflation in light of the fact that the Fed's balance sheet has grown from $900 billion in 2008 to $2.9 trillion today? And the money supply as measured by Money of Zero Maturity is growing at a double digit rate over the past 5 months. Where have the global bond vigilantes gone, considering the fact that our deficits and debt are at record levels? And now, the Federal Reserve is out of the game of buying 75% of all new Treasury issuance. Given the above data, it just doesn't make sense to have the Ten year yield trading 60% lower than its 40 year average.

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