September 2, 2009 – The yield on the 10-year T-note closed today at the lowest level since May. Yields have fallen on fears of another de-leveraging as we approach the 1-year anniversary of the Lehman Brothers collapse. These fears have been heightened by the sharp decline in recent weeks on the Shanghai Stock Exchange, which can act as a leading indicator at times. Central bank purchases have also helped the price of T-notes and T-bonds.
It is unlikely that these lower yields can be sustained unless there is another vicious de-leveraging like one year ago. The Federal Reserve is doing everything it can to prevent another meltdown. Given the size of their effort to flood not just the States, but the world with dollars, they will succeed. But at what cost?
The Federal Reserve is debasing the dollar, which is a reality not lost on holders of long-term debt. They will undoubtedly require higher yields because of this growing risk. I therefore still favor the short side of this market.
In any case, today’s closing yield of 3.29% stopped our short sale from 3.38% on July 13, 2009.