Treasury Market Rebellion

Although we are typically not alarmed by short term market movements, we feel compelled to comment on today's developments in the Treasury market. As of the time of this writing, the yield on the 10-Year Treasury note has just surpassed 3.7%. Consequently, the average interest rate for a 30-Year fixed mortgage has climbed firmly above 5%, threatening to undermine a host of Government rescue schemes. We have been both surprised and impressed by the speed at which the yield on the 10-Year has been driven upwards-Surprised because we thought the process would take considerably longer to play out, and impressed at the Market's power in the face of a Federal Reserve intent on lowering the yield.

During the period of time in which the world financial system was supposedly on the brink of disaster, we were told that government intervention was required "at any cost". Well, it appears that catastrophe has been averted, but at what cost? Clearly, we think, the Market is judging (quite ruthlessly) the creditworthiness of the United States in the context of its ability to repay the obligations that it accrued, at an exponential pace, over the past six months.

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