From Bloomberg:
Dec. 18 (Bloomberg) -- The extra yield Treasury investors demand to hold 10-year notes over 2-year securities touched the widest since February on speculation an extension of tax cuts will spur growth and increase deficits.
The benchmark 10-year yield rose this week to the highest level in seven months as retail sales advanced in November more than economists forecast and the Federal Reserve said the recovery is continuing. The U.S. economy grew at a faster pace in the third quarter, a report is forecast to show next week.
“The market will be subject to selling,” said Brian Edmonds, head of interest rates in New York at Cantor Fitzgerald LP, one of the 18 primary dealers that trade directly with the Fed. “It’s hard to think of anything good for bonds coming out of the tax-cut extension. Something has got to give.”
Questions to think about:
Why would the tax extension cause bond yields to increase? What impact do you think this should have on the USD? Try to trace through the impact through the money ( bonds), goods and services, and forex markets.
Why would better than expected retail sales figures cause bond yields to rise?
What impact will this have on the public debt: GDP profile in the US?
