U.S. six-month T-Bills at 4.75% are starting to look attractive, but I wouldn’t buy them just yet. Why? Because rates are going higher. Within the next couple of months, you will likely be able to get 5% on six-month T-bills, maybe even on 91-day T-bills.
And, this isn’t just a U.S. thing–interest rates are rising worldwide. The European Central Bank raised interest rates a quarter point last week, while analysts believe the ECB will raise rates two more times this year. In Japan, the Central Bank there may shift its interest rate policy when it meets this week. Only Canada has been slow to raise interest rates (because higher interest rates there will only add to the Canadian dollar’s fuel).
According to Merrill Lynch, so far in 2006, U.S. Treasuries are down 0.74%, including reinvested interest. This is the single worst start to a year for Treasuries since 1999.
U.S. bonds are definitely not the place to be in light of rising global interest rates. Last week, U.S. 10-year Treasuries had their biggest weekly drop since January. If you need to park cash, go with very short-term T-bills.
I keep warning my readers: The investing and non-investing public has not yet fully understood how higher interest rates will affect the economy. It takes six to 12 months for higher rates to filter through the economy. We already see the effects of higher rates on the real estate market.
But, the general stock market hasn’t hurting yet. And it’s only a matter of time before it does. If American investors can get 5% from guaranteed short-term T-bills, why risk their capital on stocks or real estate? As for companies that make up the popular stock market averages, their borrowing costs are rising rapidly. The U.S. Prime Rate, the rate at which the most solid companies can borrow money, is now at 7.5% — that’s up 36% from a year ago. Higher borrowing costs are going to start hurting companies with big debt soon (if they haven’t started already).
NEWSFLASH-Sales of existing U.S. homes fell 2.8% in January of 2006 to a new two-year low. The number of resale homes now on the market in the U.S. has hit 2.91 million… the biggest number since August 1998. This could just be the beginning of progressively worse housing statistics.