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I’ve just being catching up with blogoland. It seems that there is a theory that rising yields are good. That they indicate that the economy is improving.

Leaving aside the normative, and addressing rather why rates are rising currently. Rates are rising because holders of bonds are selling them. They are selling them faster than [in greater volume] than buyers are buying them.

The largest single purchaser for the last four years possibly even longer, was the Federal Reserve. The Federal Reserve are still committed to buying Treasury paper, but, holders are selling faster than the Fed has been buying.

China is a large holder of US paper, as is Japan. With China going into meltdown currently, viz, their inverted yield curve, any run to liquidity involves selling what you can sell. The US Treasury market is liquid. China will have profitable positions in US Treasury paper, particularly the longer dated paper. If they, Chinese banks need liquidity, and they hold US paper, at a profit, this is a good time to sell.

Certainly some big US bond funds, PIMCO, and Doubleline have indicated that they may be buyers, but their buying power absent the Fed in the face of obviously huge sellers [which is why I’m guessing China] is insufficient to keep rates lower.

– The People’s Bank of China injected 50 billion yuan ($8.17 billion) into the financial system on Thursday after a cash squeeze pushed money-market rates to record highs, Bloomberg News reported, citing an official at a state-owned bank. The money was supplied to a single lender through short-term liquidity operations and more lenders were in talks with the central bank to obtain financing, the report said, citing Hao Hong, chief China strategist at Bank of Communications Co.

The rates are not rising because the US economy is improving. The US economy is still shite. Are rates rising a ‘good thing’? Yes, I would say that they are. Cheap money is allowing the production of low demand goods and services. This impedes and pushes production costs higher for goods and services that are more highly demanded. Higher rates will more closely match the natural rate of interest, which provides for the most efficient production of highly demanded goods.

The sooner Bernanke removes the Fed from the real economy the better. Initially, the resetting of markets of a Fed in absentia, will be brutal, but, it will settle out. The real economy is more important than the economy of the financial markets.

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