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52wk Range: 1.39 – 2.14

May 29, 2013

Last August, the 10-year Treasury note was at an all-time low of 1.39 percent, an amazing but little recognized development in the world of finance. Since then, the 10-year has bounced around, but generally trended up, until the last couple of months when it returned to the 1.6 range as recent as two weeks ago. As I write this at the opening of the market on May 29, the 10-year is at 2.16 percent. Some may say, “So what’s the big deal? That is still very low and it is only about a half percent move in the 10-year treasury.” While it is only a 0.65 percent move in the 10-year interest rate it is about a 30 percent actual move in the rate considering how low the rate is to begin with. And that is in just over two weeks! Since last August, interest rates on the 10-year have increased by 55 percent. The Federal Reserve may have avoided market gravity up to this point, but it appears gravity may be winning the battle.

What has caused this dramatic move? Someone had the gall to ask when the Fed might have to ‘taper down’ their purchases of treasuries and/or mortgage-backed securities. Isn’t it ironic that just the mention of the Fed someday slowing up (NOT QUITTING) their purchasing/quantitative easing can wreak havoc in certain markets that they have been manipulating? Unfortunately, the markets the Fed has been manipulating has a ripple effect throughout many other financial markets. Are we about to see what the result of the unwinding of this grand experiment will be? I can’t imagine it, because part of the total experiment, in my opinion, required an ever-increasing intervention (manipulation/liquidity), and even the slightest indication of holding status quo would be considered a negative to the overall markets. This is the trap, or the hole, the Fed has put us in that I have been mentioning. Once you start you can’t stop, and even the slightest suggestion that maybe we should consider an exit strategy at some point sends markets into turmoil. Was it wrong to ask the question of when the Fed may need to ‘taper’ down? No, it was just wrong to go this long without asking the question!!!

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