Why Yields Are Rising

First there are kisses
Then there are sighs
Then before you know where you are
You're saying goodbye
--Boy George

Interesting missive by Peter Atwater on rising Treasury yields. While many attribute recent Fed 'taper' talk or a strengthening economy to recent rate rises, Atwater thinks that this thinking is misguided and misses the most obvious and profound story concerning Treasuries: demand has peaked.

Fixed income, he posits, is largely a confidence game, and he offers five factors that have driven a secular bull market in fixed income over the past 30 years. These factors range from increased confidence in the Federal Reserve to changes in asset allocation strategies.

This 'perfect storm' of confidence pushed bonds to bubble-like prices, culminating in a recent buying orgy with ten year yields at less than 1.5%.

Atwater thinks that the buying peak has now passed and the road to lower prices may be pretty steep. "Confidence takes a long time to form buy just moments to destroy," he observes. "I expect that the speed of the rate rise will be jaw-dropping."

The consequences of rapidly rising rates, rates that the Fed can no longer control and that everyone sees that the Fed can no longer control, are ominous.