The Bond Market Sees It Coming

No, not the stock market. Those guys are still betting on a magical super recovery. The bond market on the other hand is going haywire, with a selloff yesterday so steep that it sent a new treasury bond curve record.

The U.S. Treasury yield curve moved to its steepest level on record on Wednesday, with the spread between 10- and two-year note yields gapping to 275 basis points, beating a previous peak set in 2003.

U.S. government debt prices fell sharply as a well-received auction of new five-year notes proved insufficient to assuage ongoing concerns about the growing supply of bonds.

Analysts are increasingly concerned about the Treasury's ability to fund costly economic rescue measures that are expected to drive this year's budget deficit to $1.75 trillion.

An auction of 7-year treasury notes is on today, giving yet another chance to spike the markets.

So what? "The bond markets sucks, what does this mean for me?" Real simple: the bond market determines long-term interest rates in the short run. A selloff of this magnitude is pushing interest rates back up sharply across the board, and that's bad, bad news for the housing market (as if it needed any more bad news). This means adjustable rate mortgages will be adjusting up, meaning higher mortgage payments for millions of Americans if this keeps up.

In other words, inflation. It's back, and it's back big time.

But it's also a massive alarm bell here. People are dumping Treasury bills like they are radioactive, and they are in a real sense. Remember, Treasurys are basically IOUs from the government. If people aren't buying America's debt, America is in even more short-term financial trouble. America has to sell this debt to raise money to cover the trillions in the deficit.

What the bond market is saying is "Hey pally, you're issuing way the hell too many IOUs." And it's saying that with a lot of exclamation points.

Higher interest rates means that recovery people keep talking about in 3Q-4Q 2009 is going to take a major hit along with a whole lot of Americans.

If it gets to the point where we can't sell all the Treasurys we auction, we're in instant serious trouble.

Obama's borrowed trillions. Rates are now going up. That will cause inflation. You will have to pay more for everything while your wages go down in this economy. We've hit the point where the inflationary pressures of borrowing so much has now started to counteract the deflationary pressure of falling real estate prices. The market thinks housing is starting to recover, starting to hit bottom. I don't think that's true, and that actually might be good news: it will counter this inflation spike if real estate continues to fall.

But for how long?