Why Interest Rates Are Jumping...

The chart below shows us that the yield on the 10-year T-Note has gone from a low of 2.38% on October 8th to 3.45% as of Tuesday’s close. That's a yield spike of over +44%!

The primary reasons for the jump are as follows:


1. Economic reports, including consumer spending and retail sales have exceeded expectations.

2. Economic growth is projected to improve in 2011 thanks to persistent quantitative easing by the Fed and the almost certain extension of 2010's tax rates for the next two years.

3. As a consequence of 1. and 2. above, the risk of a double-dip recession is abating, a primary reason why rates have stayed so low for so long.

4. The less the likelihood of a double-dip recession, the less the risk of a deflationary malaise and the greater the likelihood of inflationary pressures.

5. And the less the likelihood of a double-dip, the greater the likelihood stocks will outperform bonds in 2011. As a result, hedge fund managers and savvy investors are selling bonds to buy stocks. And the stampede for the exits before year end is adding further fuel to the momentum. Thirty-year T-Bond yields are also on the rise...