Here are the figures from the Wall Street Journal.
On December 31, 2008 the value of the current long bond was 137:05, yielding 2.6677% (This is the 2038 May 15 4.500)
One year later, the same bond traded at 98:05 and yielded 4.6169%
Link: US Treasury Quotes
This is only the beginning of the disaster in bond prices unless the Fed can find a way to decrease the monetary base.
MONETARY BASE
In the same time period, the stock market increased 16% from 6000 to 7100 as Fed stimulus took hold.
NYSE COMPOSITE
During the same time period, commodity prices have soared in the past 18 months after collapsing in 2008.
Notice this is a three year chart.
CRB INDEX
Link: CRB Index
Producer prices have recently began to rise.
PPI
The value of the Euro has recently dropped after a prolonged increase.
EURO
SUMMARY
Increases in the monetary base dominated all other factors in explaining changes in economic activity including the stock market, bond prices, currencies, and commodities.
As banks find credit-worthy customers, consumption, income, production, savings and investment will increase for individuals, businesses and governments.
This time is still a long way off, at least 6 months and maybe as much as 18 months.
TACTICS
Money market arbitrage is still the best tactic for depository institutions. Spreads have narrowed as more market participants bid down yields on high-quality assets.
Let long term assets continue to roll off, and be very careful replacing them. No matter what the Fed does, there will be pressure on the long end of the curve.
Lending is still a difficult proposition with credit quality dominating decision making.
STRATEGY
The institution has weathered the most destructive and dangerous storm since the great Depression of 1929-33.
It is now time to re-asses risk taking. The businesses and borrowers that survived this period will thrive in the years to come.
Identify those businesses and activities in your market and begin to work with these borrowers.
