Why Rates Won’t Fall By Much This Year
Monday, January 30th, 2006
By Michael Lombardi, MBA for Profit Confidential
Last week’s U.S. government auction of two-year notes drew the weakest demand in nine months. Demand for the $22 billion in U.S. treasuries trying to be sold was much weaker than expected.
Bloomberg News quoted Robert Auwaerter of Vanguard as saying. “the market is extremely concerned about the amount of supply coming out.” The supply is there because the money is needed to fund an increasingly large U.S. deficit.
The U.S. is becoming increasingly dependent on foreigners to buy its debt securities. While foreigners only owned about one-third of all U.S. treasury securities as recently as five years ago, today foreigners own about half of all outstanding U.S. treasury notes.
One really has to wonder if the Federal Reserve Board’s actions in lifting rates 13 times in a row (soon to be 14 times) since mid-2004 was more than just an effort to cool the heated housing market. After all, with government debt spiraling, we are becoming more and more dependent on foreigners to finance our debt.
In the past, with foreigners flush with the U.S. dollars they received for their oil and other American-wanted products, American short-term securities were a good place to park U.S. cash. But, the economic environment may be different now. Foreigners could be looking for a higher return on their investments now because they are concerned about too many dollars in circulation.
Last week, President Bush signed legislation raising the maximum government debt by another $800 billion. When will the spending stop? When so many U.S. dollars are printed that no foreign country wants them?
As it becomes further apparent that higher interest may be needed to attract foreigners to our debt, higher rates might have to remain. You may want to take those predictions of lower rates ahead, as many analysts are predicting, with a grain of salt. Sure, lower rates could spur the softening U.S. economy, but if they go too low we’ll have a problem funding our deficit. It’s a classic Catch-22 situation. And, a U.S. dollar declining too quickly against other world currencies will likely push American rates higher.
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
