With The 10-Year Treasury At 3.28%, Can We Start Calling This A Bond Market Crash?

What's up, Ben?

Somehow, we don’t think this is what Ben Bernanke had in mind when he launched another round of easy money five weeks ago.

Indeed, he promised us lower long-term interest rates, but on Wednesday morning, the yield on a 10-year Treasury note reached its highest level in more than six months, 3.28%.

There are two possible explanations: the benign one, and the more likely one. The benign one, pimped by Deutsche Bank, zeroes in on the cut in payroll tax that’s part of the grand bargain between President Obama and congressional Republicans. Deutsche figures that’ll add 0.7% to GDP during the next two years.

The more likely one is evident even to the always-late-to-the party analysts at Moody’s and Fitch: The grand bargain is just digging Uncle Sam into a bigger hole. The rating agencies reckon that with no spending cuts as part of the deal, it’ll add another $1 trillion to the national debt, above and beyond what’s already baked into the cake.

Really, should anyone be surprised? After Bernanke launched the first round of “quantitative easing” in March 2009, the rate on the 10-year spiked from 2.5% to over 4% within three months.? Look for 4% by early February, but let’s even go a step further.

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“Every streak must come to an end,” says our income-investing specialist Jim Nelson. “On Nov. 17, that truism hit home in the bond fund world. It was the first week in the previous 100 that saw a net outflow of money. “Investors, after nearly two years of manic consumption, are finally leery over the future of bonds.”

That outflow continued in the week ending December 1, according to a report from EPFR Global analysts. Few sectors were spared…

• Global bond funds suffered their second outflow in 3 weeks
• Redemptions on high-yield funds hit a 6-month-high
• Emerging-market bond funds saw 2 consecutive weeks of outflows for the first time since April 2009.

There’s no shortage of reasons, Jim says. “Start with QE2…then add Ireland’s new massive bailout…throw in the new permanent bailout fund for the eurozone. And what do you get? Panicked and confused investors.

“Now, that’s not to say they won’t forget about this in another couple of days and pile right back into bond funds. But if this is a true turning point, we might soon see some discount opportunities – something we haven’t had in quite a while.

“But,” Jim reminded his Lifetime Income Report readers recently, “even as the rest of the world struggles with tough issues, we still find ourselves in a pretty good place. We have a number of solid, undervalued plays that have plenty of capital and growing dividends.”

Ah, dividends. That’s going to be the key for income investors if the 28-year bull market in bonds is really over. Say this much for the Obama-GOP Grand Bargain: It leaves the tax rate on dividend income alone, at least for two more years.

Two Possible Reasons for the Rise in 10-Year Treasury Notes by Addison Wiggin originally appeared in the Daily Reckoning.

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Why December 15 Could Be The Day Tax Hikes Crash The Stock Market

Leona Helmsley and Trouble

This week, we witnessed this spectacular moment in the history of the republic: Having just left a luncheon at the office of Rep. Ron Paul (R-Tex.), we were walking across the Capitol steps to get to Union Station. One of our party mentioned he had never been to the House gallery to view the floor debates. So we decided to drop in as tourists.

After negotiating the labyrinth of security, coat checks and corridors, we were ushered into three seats in the front row of Gallery booth No. 7, less than two feet behind the C-SPAN cameras installed there to monitor the proceedings. A scant five minutes passed and Rep. Joseph Crowley (D-N.Y.) walked to the podium with an easel and a 5-foot picture of the late hotel heiress Leona Helmsley holding her dog, Trouble.

“Under the Republican plan,” we gathered from his speech from press reports later, “if Trouble doesn’t get a tax break, nobody else should. Under the Republicans’ plan, this country will go to the dogs. They’ll protect this little dog, but they won’t protect the middle class of this country.”

“Ugh,” we said, “We can’t listen to this.” We got up and left. In Dr. Paul’s office, we had heard how everyone in attendance had planned to vote already. Surely, the grandstanding Mr. Crowley was just getting his arguments logged into the public record.

Ha. Fat chance. No sooner had we returned home but saw the same smug photo of Helmsley featured in the lead story on Nightly News With Brian Williams. Mr. Crowley’s absurdity had actually been taken seriously–nay, lapped up by the press. In the end, Democrats got their bill passed. The so-called Bush-era tax cuts were made permanent for individuals with incomes below $200,000, and couples below $250,000.

Three members of the Liberty Caucus we met for lunch – Ron Paul, Walter Jones and John Duncan – were the only Republicans who “crossed the aisle” figuring a tax cut for some people is better than for none. They say they’ll really get down to debating taxes when this lame-duck session of Congress is over.

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Meanwhile, employers across the nation are wondering how much money they should withhold from employees’ paychecks just four weeks from now. The IRS is dithering on issuing its new withholding tables, which usually come out in mid-November. Payroll departments need two or three weeks to plug the data into their computers.

What if nothing happens by, say, December 15? Our forecast: We’ll see one doozy of a stock market sell-off.

“Capital gains tax rate will increase from 15% to 20% if the tax cuts are not extended,” says analyst Daniel Clifton of Strategas Research Partners. “The last time the capital gains tax rate increased – on January 1, 1987, from 20% to 28% – investors realized their gains at the lower tax rate.”

Clifton says many of his clients will decide whether to hold on or sell by December 15 a week from next Wednesday. That’s the last day to trade stocks before index options cease trading in advance of options-expiration Friday. If Congress doesn’t act, investors will.

The Trouble With Tax Cuts by Addison Wiggin originally appeared in the Daily Reckoning.

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