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“The interest rate on the 10-Year Note has risen from 1.58% on December 6th of last year, to as high as 2.03% by mid-February.  Most equity market cheerleaders are crediting a rebounding economy for the recent move up in rates.  According to my count, this is the 15th time since the Great Recession began that the economy was supposedly on the threshold of a robust recovery.


However, the reading on last quarter’s GDP growth was negative, and the January unemployment rate actually increased.  Therefore, it would be ridiculous to ascribe the fall in U.S. sovereign bond prices to an economy that is showing signs of an imminent boom....


Continue reading the Michael Pento piece below...




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The truth is that rising bond yields are the direct result of stability in the European currency and bond markets, the inability of the U.S. to address its fiscal imbalance, and a record amount of Federal Reserve debt monetization.


The euro currency, which was thought to be on the endangered species list not too long ago, has surged from $1.20 in the summer of 2012, to $1.36 by the beginning of February.  In addition, bond yields in Spain and Italy have recently fallen back to levels that were last seen just before the European debt crisis began.  Renewed confidence in the euro and Southern Europe’s stronger bond markets are reversing the fear trade into the dollar and U.S. debt.


Washington D.C. was supposed to finally address our addiction to debt and deficits in January of this year.  Instead of refusing to raise the debt ceiling and allowing the sequestration to go into effect, our politicians seem to be able to agree on just one point, and that is to delay austerity.  President Obama claims that the nation has already cut deficits by $2.5 trillion over the last few years.  Nevertheless, the deficits have totaled $3.67 trillion in the last three years alone!  The absolute paralysis of Congress to agree on a genuine deficit reduction plan has finally given bond vigilantes a wake up call that was long overdue.


Finally, the Fed increased its level of money printing to $85 billion, from $40 billion on January 1st.  This record amount of debt monetization comes with unlimited duration and is accompanied by an inflation target of at least 2.5%.  The Fed’s actions virtually guarantee that real interest rates will fall even further into negative territory, despite the fact that nominal rates are rising.


So how high will interest rates go in the short term?  It seems logical to figure they will increase at least to the level they were prior to the European debt crisis.  Back in the fall of 2010, just prior to the spike in Southern Europe’s bond yields, the interest rate on the U.S. benchmark Ten-year Note was yielding around 3.5%.  Therefore, unless there is another sovereign debt crisis in Europe (or perhaps one starting in Japan), I expect interest rates to trade back to the 3.5% level in the next few quarters.


This means U.S. GDP growth will be hurt by the rising cost of money and the tax hikes resulting from the January expiration of some of the Bush-era rates.  Rising tax rates, one hundred dollars for a barrel of oil, and increasing interest rates significantly elevate the chances of a recession occurring in 2013.


Since rates are increasing due to debt and inflation concerns, it also means the Fed will have to decide between two very poor choices.  It would never choose to stop buying new debt and start selling its $3 trillion balance sheet, as that would send bond yields soaring in the short-term, and the unemployment rate into the stratosphere. So investors can’t really count this as a viable option for Mr. Bernanke.  He could simply do nothing and watch another recession ravage the economy—not a high probability given the Fed’s history.  Or, Bernanke most likely will be forced into embarking on yet another round of QE in an attempt to keep long-term rates from rising further.


This would be the most dangerous of all of the Fed’s options as it will send inflation soaring and cause interest rates to rise even higher down the road.  The resulting chaos from interest rate and economic instability is the main reason why I have decided to hold a significant portion of my portfolio in the precious metal sector.”


The Egon von Greyerz KWN audio is available now and here is a direct link to LISTEN NOW.


The Felix Zulauf audio is also available now and here is a direct link to LISTEN NOW.


Michael Pento: President & Founder of Pento Portfolio Strategies and the author of

“The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market”

To pre-order from Amazon CLICK HERE.


© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.


The interviews with James Turk, Bill Fleckenstein, Egon von Greyerz, Felix Zulauf, John Hathaway, Gerald Celente and Eric Sprott are available now.  Also, be sure to listen to the other recent KWN interviews which included Art Cashin, Michael Pento, MEP Nigel Farage, Michael Belkin, James Dines and William Kaye by CLICKING HERE.


Eric King

KingWorldNews.com

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