Archive for the ‘interest rates’ Category
The Federal Reserve has yet to announce when it will start to increase interest rates in the U.S. economy. Meanwhile, there seems to be disagreement within the central bank’s affiliates regarding its loose monetary policy.
The President of the Federal Reserve Bank of St. Louis, James Bullard, recently said, “It’s important to start to remove accommodation—even when you go up to 1 percent or 1.5 percent, that’s still very easy monetary policy.” He added, “It’s a matter of getting to a normal level of interest rates at the right time. I don’t think you want to wait until everything is exactly the way you’d expect it to be.” (Source: Saphir, A., “Fed should raise rates in 2013, Bullard Says,” Reuters, February 6, 2013, last accessed March 12, 2013.)
In anticipation of the eventual end to the “easy money” policies of today, the bond market is selling off. From the chart below, you can see that bond investors ran toward the security of 30-year U.S. bonds in early 2012. But one year later, 30-year U.S. bonds are losing ground. Actually, the 30-year U.S. bond market has been falling since the beginning of 2013.
Chart courtesy of www.StockCharts.com
The theory that’s making the rounds as to why the bond market is falling is that as the Federal Reserve continues to keep the interest rates artificially low while increasing the money supply, inflationary pressures are building up, and the Fed will eventually need to raise interest rates to fight inflation. Interest rate hikes might just come sooner than some might think; hence, the bond market, as a leading indicator, is reacting now…. Read More
With the uproar in Europe continuing unabated, the rush into the safety of bonds through “safe” countries like Germany and the U.S. is doing much to distort the mechanism of the financial markets, throwing a monkey wrench into the investment strategy of many people. With the yield of the 10-year Treasury now trading at approximately 1.55% and nations like Germany having 10-year yields of 1.2%, one must be careful not to make the common mistake in one’s investment strategy of running for cover and not looking out into the horizon.
When taking into account inflation, investing your money in 10-year Treasury notes at just 1.55% could be a very costly mistake. You are essentially willing to make no money after inflation and perhaps even lose money. The rush into the 10-year Treasury does not consist of small retail investors, but rather large institutions that are parking their money until a better opportunity arises. As a small retail investor, I would caution against following the large funds; in fact, I like to go against them. They are like massive boats; very slow to adjust once they start moving in one direction.
One area that makes sense over an investment horizon greater than a decade consists of stocks that pay a good dividend yield. There are plenty of stocks that exceed the yield of the 10-year Treasury in addition to the possibility of capital appreciation. One area that most investors overlook is that of preferred shares. Preferred shares offer a higher dividend yield than common shares and carry some preferential treatment. Because they don’t trade as often, many investors aren’t … Read More
The economy is barely showing any signs of life…meanwhile the government and the Fed are trying everything they can to get gross domestic product (GDP) growth going again.
One area for economic stimulus that has been explored to the point of being completely exhausted is reduced interest rates. Or so I thought. Short-term interest rates can’t go any lower, can they?
I stand corrected. What I’m about to tell you gives a whole new meaning to “desperate times call for desperate measures” when it comes to U.S. Treasuries.
In May of this year, the Treasury Borrowing Advisory Committee is going to discuss how to modify its regulations in order to permit the sale of U.S. Treasuries with negative interest rates. Yes, negative interest rates.
It may soon be possible to pay the government for the “privilege” of owning U.S. Treasuries, for the privilege of holding your money in safe government securities. Yes, at 100% debt-to-GDP and over $15.0 trillion of U.S. debt and counting, it is amazing that U.S. Treasuries are deemed so “safe” that one would pay the government for the privilege of holding U.S. debt.
With the financial turmoil in Europe (more on that in “Michael’s Personal Notes”) investors flocked to U.S. Treasuries, sending rates so low that some investors actually paid for having their money in a perceived “safe” area of the world. The U.S. and Germany have lived such experiences recently.
After having witnessed this transpire in the markets, the U.S. Treasury naturally is thinking, “Let’s just issue U.S. Treasuries at … Read More
Looking at 2011, the only asset class in the U.S. that fell in value was residential real estate (the same will happen in 2012). The stock market was up this year; the bond market was up; precious metals’ prices were up in price, too. Oil prices rose aggressively in price in 2011.
As for consumer goods, food prices were up sharply in 2011. So much so, even McDonald’s Corp. (NYSE/MCD) needed to raise prices. Our neighbors to the north, Canada, just announced that their inflation rate rose 2.9% in November from a year ago. Other countries are reporting sharply higher inflation. Buyers of government-issued bond in the Western world are seeing their capital erode, as the inflation rate is higher than the return on the bonds!
During the year, I have written about how the Federal Reserve’s actions of artificially keeping short-term interest rates at zero for five years (the Fed said it would keep interest rates low until 2013) and the $2.0-trillion increase in the money supply are extremely (almost critically) inflationary.
Investors and consumer who believe that interest rates will be kept low indefinitely are in for a rude awakening. Sure, only few believed me in 2005 when I said the U.S. housing market would crash and create havoc for the U.S. economy. And few believed me in 2006 when I said we were entering a recession.
My most important message this year, dear reader, is a warning about higher inflation and higher interest rates coming our way much faster than we expect. And you should prepare yourself for this.
The last time interest rates fell so low … Read More
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