Morning Market Thoughts

by DAN Good morning. Futures are down as the bond yields continue higher. The dominant news seems to be China’s apparent change instance regarding its U.S. Treasury purchase program. If China reduces it’s bond buying program, it is going to be a problem. As most Treasury watchers know, China is the largest holder of U.S. debt, totaling more than $1.24 trillion of the $6.3 trillion in T-bills, bonds, and notes held by foreign countries. They own nearly 20% of all U.S. debt to foreign countries.

In the simplest terms, China is the main enabler of U.S. spending habit. About 60% of U.S. spending is on entitlements — mandatory expenses that aren’t negotiable. There’s no real “art of the deal” to curb entitlement spending. Instead, it’s likely to balloon over the next several years due to the influx of immigrants, many of which will likely start receiving benefits fairly soon. This is just a fact. So as our as our entitlement debt grows, we’re gonna need someone to keep buying our bonds.

Given the 25% increase in the 10 year Treasury yield over the past four months, it’s safe to say that our debt isn’t as attractive as it used to be. So watch the bond yields — they matter. Be mindful that institutions are always gauging the relative value of equity and bonds. With money so cheap, equities have been attracting money — lots of money. As yields rise, equities become a bit more expensive relative to fixed income. It’s not a big deal now…but that might change if yields continue to rise.

Don’t forget that I’ll be releasing my new course to all my active members tonight no later than 8:00 p.m. If you follow the methods I will be discussing, you really can’t help but improve your performance. Promise.

–Dan

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