Last week, the U.S. bond market fell substantially and yields rose as investors finally began to see the obvious: Quantitative Easing (the purchase of U.S. Treasury bonds by the Federal Reserve) and its potential inflationary pressures are weakening the U.S. dollar.
As most economists will tell you, the U.S. economy is in a depression. Statistically speaking, most depressions are deflationary and therefore accompanied by a fall in interest rates. However, the bond market’s recent behavior provides evidence that the current depression is not deflationary. On the contrary, inflationary pressures are building and interest rates are rising. Bond investors, looking ahead and seeing a light, are realizing that it is the headlight of an oncoming train…and this oncoming train is the trillions of dollars of U.S. bonds which must be floated by the Federal Reserve in the next few years. The consequences of this flotation will include a weakening of the dollar and an increase in interest rates. Investors are finally awakening to this trend which we believe will continue for some time. (more)
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