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  • Why The Fed Needs You To Sell Your Bonds

    Today I will attempt to explain why longer-term interest rates have fallen significantly this year when almost everyone expected rates to rise. This discussion focuses on the fact that there is a shortage of Treasury securities in the marketplace today, especially in maturities of 10 years or longer. The shortage is due to a combination of factors that I will discuss below.

    The bottom line is that when Treasuries are in short supply and demand is strong as it has been this year, buyers bid up the prices of these securities. When bond prices go up, yields fall. This is why the Fed would like investors to sell their bonds to help solve the shortage.

    It is doubtful that this trend of lower interest rates will continue if the economy continues to gain momentum. This should be an interesting letter for those of you who own bonds and pay attention to interest rates.

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  • CBO: U.S. Debt Crisis On The Horizon

    Introduction

    The non-partisan Congressional Budget Office (“CBO”) released a very troubling new report in the last week of July. The new report is entitled “Federal Debt and the Risk of a Fiscal Crisis” and warns that we will face financial calamity if we do not get our massive budget deficits under control.

    The CBO report points out that the national debt, which was 36% of the gross domestic product three years ago, is now projected to be 62% of GDP at the end of fiscal year 2010 on September 30. And it continues to ratchet up every year thereafter, even in the CBO’s “baseline” (more conservative) projections.

    The CBO specifically warns that our out-of-control deficits could lead to the ultimate debt crisis when buyers of Treasury securities lose faith in the government’s promise not to default on these most trusted financial instruments. No kidding!

    I have been writing about the perils of increasing our national debt year after year since back in the 1980s when I criticized President Ronald Reagan for doing so, and every president since him. The concern was that in 20-30 years, the ultimate debt crisis would come. Guess what: it’s now been 20-30 years, and even the CBO now warns that the day of reckoning is on the horizon.

    This week, I’ll summarize the latest CBO report. After reading about it, you need to think seriously about how you will protect your assets when the day comes where US Treasury securities are no longer trusted – think sharply higher interest rates! This will be a continuing theme in the weeks and months ahead.

    But before we jump into the latest troubling CBO report, let’s take a quick look at the latest economic reports, most of which have not been favorable. It has been several weeks since I wrote about the economy specifically, so let’s get caught up.

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