Does the Fed really want rates to rise this fast?
The 10-year Treasury yield approaches 2.9% as investors worry about the Fed slowing its bond buying program. Stocks sag again to their lowest levels since July.
You know the old saw: "Be careful what you ask for"?
Well, just talking about tapering bond purchases, and how the Federal Reserve will still keep interest rates low, has done just the opposite.
Despite the jaw-boning by Fed Chairman Ben Bernanke, pictured, and other Fed officials, the 10-year Treasury yield, which is what mortgage rates are built on, has jumped from 1.944% in late May -- when Bernanke first began to talk about tapering, or winding down the central bank's big bond-purchasing program -- to close at 2.893% on Monday.
That's the highest yield for the 10-year Treasury security since July 28, 2011, when the yield was 2.95%.
The rise in interest rates has shaved 4.1% from the Dow Jones Industrial Average ($INDU) and 3.7% from the Standard & Poor's 500 Index ($INX) since their record closing highs on Aug. 2 -- and 2.8% from the Nasdaq Composite Index ($COMPX) since its 2013 closing high on Aug. 5. The Dow Jones Transportation Average ($DJT), watched closely as a leading indicator, has fallen 5.1% since Aug. 1. Thanks to Monday's rate rise, the Dow closed down 71 points to 15,011. The S&P 500 was off 10 points to 1,646, and the Nasdaq fell 14 points to 3,589, a disappointing close. The index had been up as many as 21 points earlier in the day. The closes were the lowest since early-to-mid July.
It's hard to believe that anyone at the Fed saw this kind of reaction coming, much less wanted it. Bernanke has worked to keep rates low to help the modest economic recovery that began in 2009.
At the same time, the market's stress is a worry because if you see the stock market as a way at looking where the the economy will be in six months or so, the market reaction suggests the future looks, well, a touch dicey.
Rising interest rates could depress housing activity, at least in the short term. It could depress auto sales. And rising rates could cause consumers, whose confidence that they will have jobs in six months may not be very high, to think twice before buying, say, that big flat-screen television.
The tapering talk has crushed homebuilding stocks. The group has been a Wall Street darling for about two years. The iShares Dow Jones U.S. Home Construction exchange-traded fund (ITB) has fallen 20.6% since May 14. D.R. Horton (DHI) has seen its shares fall 33.7% in the same time frame. Those are bear market numbers, folks.
It has put a cap on auto stocks. Ford Motor (F) was up 35% for the year on Aug. 2. The shares are off 7.9% since. General Motors (GM) is down 7.1% since its July 24 closing high of .
The worry now is that U.S. interest rates will move so high as to pull money out of Europe, out of Asia and out of the emerging markets. The Jakarta Composite Index in Indonesia has fallen 17% since Bernanke posited the idea on May 21. India's Sensex Index is off 9.8% since a July 23 peak. Brazil's Bovespa Index is having a dreadful year and was down as much as 29% on July 3. While it has rallied up 13% since, it is still down 18.3%.
The market's slide on Monday came at the start of a busy week.
Two big economic events come on Wednesday: release of the minutes from the Federal Reserve's July meeting and the July existing-home sales report from the National Association of Realtors.
The Fed minutes will feed into the concern about the Fed and possible tapering. There is division in the Fed over whether to taper.
Also due the rest of the week: jobless claims and leading economic indicators on Thursday and new-home sales on Friday.
It's a week of big earnings as well:
On Tuesday, J.C. Penney (JCP), Home Depot (HD), Best Buy (BBY) and Barnes & Noble (BKS) report.
Wednesday brings Hewlett-Packard (HPQ), Target (TGT) and Lowe's (LOW).
On Thursday, Abercrombie & Fitch (ANF), Dollar Tree (DLTR) and Sears Holdings (SHLD) are scheduled.
Due on Friday are Ann (ANN) and Foot Locker (FL).
More from Top Stocks
but that the bond market crowd, AKA Vigilantes, do. Unfortunately this theme is inconsistent
with the concept of the FED being the major dominant "matrix" of the interest rate.
The fed should have only three jobs.
1. Maintain an accurate and honest CPI.
2. Keep the real inflation rate between a deflationary 1% and 0% inflation (no more inflation). This will increase the purchasing power of the consumer. Also, this will bring real earnings to saving. If, savers can earn real income on savings, interest rates will stay low. Also, it will increase the value of the dollar. This would move money to America (an estimate 5 trillion dollars).
3. Replace the fed with a computer program ASAP.
The title of the column sounds so naive. Of course, the Fed doesn't want interest rates to rise this fast. The Fed doesn't want rates to rise at all! Quite a few bloggers here sense what Charley Blaine does not, which is that Ben Bernanke is LOSING CONTROL OF INTEREST RATES. The Federal Funds Rate remains at 0%, yet the Treasury bond yields are rising.
Did you know that China increased its holdings of Treasuries from $1.1 trillion to $1.3 trillion only a few weeks ago? I think this was a result of the visit of Chinese President Xi Jinping to the White House. As the Chinese purchase of Treasuries was reported, the 10 year Treasury bond yield went down from 2.6% to 2.4%. Less than 2 months later, it is now headed for 2.9%!
What nobody else has mentioned yet is that the federal government cannot withstand high interest rates. Although it has been only a few years since the 10 year was around 4%, I don't think the government can withstand 4%, anymore. The federal budget is likely based on ultra-low interest rates. The funds to pay 4% interest on the 10 year bond could easily have been spent already!
Major American bond funds complained last winter that the Fed owns too much Treasury debt, and that the bond market will fail to exist if the Fed owns most of it. Well, rising interest rates will force the Fed to buy much more Treasury debt.
There is probably no way to prevent a bond market crash and the accompanying dollar plunge. Foreigners who have been propping up the dollar are fed up with the Fed! The remaining question is exactly when will the crash happen.
Bernanke is a pawn. End game soon...lookout. The QE's are coming home to roost. Keep your powder dry, don't vote for any democrats or democratic-republicans - rino's - (like chris christie and john mccain) and hope that you are able to weather inflation that would make jimmy carter blush and not destroy the US dollar. God Bless America, down with barack obama.
New Dollars for Old Dollars ! New Dollars for Old Dollars ! Get your New Dollars ! Free haircut with each claim.
We saw the dot bomb, kept buying, we saw the housing bubble, kept buying, we see Q'e and we keep....... what ever comes next what ever its called, we'll still keep buying!
Ex-Re....The only way you are going to see continuance of Bernanke's level headedness, is if Janet Yellen gets appointed FED Chief; Instead of Larry Summers...
I'm hoping Obama isn't stupid.
But Republicans will approve Summer's appointment...
And fight like hell to keep Yellen out.
Don`t underestimate big Ben.I just hope his replacement is that good.I`m still counting
my money in this market.
Copyright © 2014 Microsoft. All rights reserved.
These hot movers could rise by double digits in coming months.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.