OHH NOOO Mr. T-Bill !!!

Morning Miners!

It is 5:55 AM and the coffee is double strong. Grab a cup, we've got some serious talk this morning. There are days when we need to look beyond the latest gyrations of the stock and commodity herds, hike to the rim of the canyon and see what's on the other side. There has been a lot of ruckus coming from the next valley over and it threatens to stampede the government approach to recession recovery at home.

The Report first shot a warning flare two weeks ago in the blog, Where's the Duke When We Need Him? At that time, the 10-year Treasury bond (aka T-Bill) unexpectedly jumped to 3.70%. Well pardners, it happened again yesterday and the yield came close to nailing 4.00%.

Why is this a big deal? Let's brush up on some basics. Bonds are stocks' ugly sister; less glamorous and dramatic but no less important. The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. Let's say you lend a company $100 by buying their 1-year bond with a 5% yield. In a year, you get back your $100 plus $5. If you get tired of waiting that long to make $5 you can sell your bond in the marketplace. Let's say I buy it for $99; you lose a buck and I collect $6 above my investment at maturity. My yield is $6/$99 or 6.06%. The important thing to remember is that when bond prices go down, yields go up.


OK, enough schooling. The government has been borrowing like crazy to kick start our economy and they do this by periodically auctioning off T-Bills. If things go well, the government gets a good price for their bonds (i.e. low yield or interest rate). This, in turn, keeps down their cost of borrowing and some key consumer credit interest rates. Most notably, mortgage rates are often tied to the 10-year yield.

That's the ideal world, what happens when things go bad?

"A weak Treasury auction sent yields to the highest levels in more than seven months and unnerved stock investors who fear that higher interest rates could choke off an incipient economic recovery.

Stock markets were rattled after yields jumped following a weak auction of 10-year Treasury notes. The yield on the 10-year note jumped as high as 3.996%, highest level since mid-October.

'Higher interest rates are not good for anyone; it's going to kill the refinancing boom and slow the housing market,' said Joseph Saluzzi, a co-founder of brokerage Themis Trading." (WSJ, 6/10/09)


This pop in Treasury yield resulted in a jump in the 30-year mortgage from a fairly stable 5% to 5.79%. Get the picture? And to make matters worse, other countries are threatening to sell T-Bills and move into other debt securities placing additional pressure on yields:

SÃO PAULO -- Brazil and Russia are set to unload U.S. Treasury bonds as they acquire $10 billion each of new International Monetary Fund securities designed to bolster the institution's aid programs, officials in the countries said Wednesday.
The moves are part of a bid by the so-called BRIC nations -- Brazil, Russia, India and China -- to play a bigger role at the IMF and other international institutions. The announcements helped push Treasury yields to their highest level this year on concern that rising U.S. debt has hurt T-bill demand among big holders of U.S. dollar reserves. (WSJ, 6/10/09)

I'm not feeling the love here, buckaroos.

Enough talk, let's walk the walk:

Oil is up $0.54 to $71.87 in early trading (July contract); Gold is down $6.1 to $949.7 (August contract); Silver is down $0.145 at $15.080 (July contract); Copper is up 0.0510 to $2.4180(July contract); Molybdenum is sitting pretty at $10.50.

The DOW is up 96.97 points to 8835.99; the S&P 500, up 10.53 points to 949.68. The miners are mixed:

Barrick (ABX) $34.35 down 2.03%
Newmont (NEM) $48.97 down 1.33%
General Moly (Eureka Moly, LLC) (GMO) $2.70 up 2.27%
Freeport McMoran (FCX) $59.62 down 0.45% (a bellwether mining stock spanning gold, copper & molybdenum)

Steel stocks are up (a "tell" for General Moly):

Nucor (NUE) $47.56 up 0.34% - domestic steel manufacturing
ArcelorMittal (MT) $35.98 up 2.76% - global steel producer
POSCO (PKX) $84.74 up 3.82%- South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 0.49%.

Cheers,

Colonel Possum