can't print money out of thin air

The U.S. government’s borrowing needs are on the rise, and so are interest rates.

Now is not the time to increase borrowing. Why? Because it’s going to cost us taxpayers more. But do our elected officials care? Probably not. It’s just business as usual.

Just last week we had confirmation of rising inflation. I’ll get to that in a minute…

The Federal Reserve is promising three or four more rate hikes this year, but the government already cut taxes and is now promising to spend more on infrastructure (among other things). So now, it seems, is the time to borrow.

This week, the U.S. Treasury is selling a quarter of a trillion dollars of debt! And at a time when foreign interest in buying this debt is declining and interest rates are rising!

So far in this week’s Treasury auction, shorter-term bills and bonds are being issued at interest rates not seen since 2008. Of course, that’s based on expectations for rising inflation.

Last week, we saw that inflation moved higher than expected in January.

The Consumer Price Index (CPI) jumped 0.5% in January on the expectation of a 0.3% rise. Core CPI (excluding food and energy) was up 0.3% on the expectation of a 0.2% rise. Year-over-year core CPI ticked up to 1.8%.

CPI is a proven market mover, especially when the data surprises observers.

When I say “proven,” I refer to a New York Federal Reserve study from 2008 that explores how the release of economic data affects asset prices in the stock, bond, and foreign-exchange markets. The authors found that certain announcements generate significant and persistent price responses.

Treasury bond yields show the strongest response, stock prices the weakest.

We’re watching it play out in real time: Treasury bonds spiked higher and remain elevated after last Wednesday’s release of CPI data. Stocks pretty much ignored inflation and poor retail sales by flying higher all week.

Along with the CPI release came very disappointing January retail sales figures.

The expectation was for an uptick of 0.3%, but we actually saw a 0.3% decline. With auto sales and gas excluded, analysts expected a rise of 0.3% – and again sales fell 0.2%.

Retail sales compromise about 50% of all consumer expenditures – and represent about two-thirds of our overall economy. Markets shrugged off the data.

Both the broad January Producer Price Index (PPI) and the core inflation (less food and energy) figures were up 0.4% on expectations of 0.3% upticks. You might have thought that interest rates would jump even higher on that news, but there wasn’t much of a reaction.

Maybe it’s because year-over-year core inflation fell to 2.2%. Generally speaking, though, PPI doesn’t move the markets like CPI.

Before the PPI release last Thursday, Treasury yields hit a high of 3.19%, which is right at the resistance level. Take a look at the chart below.

Last week’s January housing starts and permits were sharply higher than December’s, so builders must not be too concerned about rising interest rates.

As always, new home sales are important to our economy because of the ripple effect they have on other related purchases new-home buyers make, like appliances, furniture, and related items, outside of just purchasing the house.

So far, rising rates haven’t hurt the stock markets or the housing industry too badly, but rising interest rates will certainly hit us taxpayers along with complacent stock investors.

You can prepare for and profit from surprises in the financial markets, and specifically in the Treasury bond market, with Treasury Profits Accelerator.

Good investing,

Lance Gaitan
Editor, Treasury Profits Accelerator 

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Lance Gaitan
Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.