Yesterday it was reported that S. Korea was going to sell a portion of U.S. Treasury bonds. This had a triple effect by bringing down the dollar, U.S. equity and bond markets.

Looks like something might of been lost in translation, or perhaps it was just a trial balloon. Now S. Korea is clarifying things by saying they are not going to sell their treasuries but rather future purchases they make may be bonds from other governments. Whew! Glad we got that straightened out.

Why did yesterday’s news such a big impact? By selling their bonds S. Korea would be driving the yield on bonds higher. more supply on the bond market would force bond traders to offer higher yields to have demand equal the available supply.

I have posted in the past that bond yields have amazingly stayed steady despite predictions to the contrary. one of the reason is that several Asian countries have still been buying our debt. They like are political stability and the yields have been relatively competitive.

I already explained the effects on yields of governments selling our debt. By not buying our debt it would probably force rates to rise to entice more buyers of our debt. and in case you have not noticed we have a lot of debt.

The effects higher yields (interest rates) would have on the economy are numerous. Those of you with an ARM mortgage could see your monthly mortgage go higher. If you wanted to get a loan, you will be paying more in interest. This could led to a cooling off or a retreat in the real estate market. Companies may not want to expand because the cost of money will be more expensive. A ripple effect could occur throughout the economy.

Now before you decide to jump off any ledges, it is important to realize that rates are starting out at a relatively low level and a portion of the market has already factored higher rates. we can expect to have more volatility and I still expect this to a difficult year for US equity and bond market, but we should not see 12% mortgages in the near future.

South Korea to Sell Treasuries–Just Kidding