Debt Yields Climbing

Wednesday, May 27, 2009

Despite the Federal Reserve's downward pressure on rates through the purchase of $300 billion in long-term Treasuries, the yield on the 10-year Treasury is climbing from the December 2008 low. Investors have been demanding higher yields pricing in the possibility of a ratings downgrade after Standard & Poor's downgraded Britain's debt to "negative" from "stable". On May 21, Pimco's well-respected Bill Gross helped further stoke fears of a downgrade saying the US will "eventually" lose is AAA-rating. Higher rates will further complicate the precarious situation in the US economy especially given that the Fed will not long be able to depress rates with its burgeoning balance sheet. The panicked flight to safety at the end of 2008 has reversed course and the US will now be forced to pay for its debt once again rather than being paid in real terms.


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