Posts Tagged ‘U.S. Treasuries’

The Threat Of Rising Interest Rates

Tuesday, April 6th, 2010

As seen on the following 10-year daily chart, the 10-Year Treasury Yield has been rising as of late:


chart courtesy of StockCharts.com

There is very little general expectation for a significant rise in interest rates.  In fact, the average economist forecast (as seen for the March 2010 Wall Street Journal Economist Survey) for the 10-Year Treasury Yield for December 31, 2010 is 4.24%.

I believe that there is high potential for interest rates to rise faster than expected, and the economic implications of such, should it happen, can hardly be understated.

Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.  These falling interest rates are seen in the 20-year monthly chart shown below:


chart courtesy of StockCharts.com

Of course, a significant rise in interest rates would have adverse effects on many different economic areas, and would likely serve to impair and/or derail any hopes of an economic recovery.  Some areas that would be impacted by rising interest rates would include: real estate, all facets of lending, the bond market, corporate profitability, etc.  The list is virtually endless.

Furthermore, consumer spending would likely be impaired, as would the government’s ability to rather cheaply (and easily) fund the outsized deficits and debts.  As well, the government’s ability to “stimulate” the economy through deficit spending could largely be impeded.

I’ve previous mentioned (in a December 2nd post) that I believe that U.S. Treasuries are in a “bubble.”  While some have expressed the same view, it doesn’t appear as if there is recognition of the perilousness of such a condition.

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Treasury Secretary Geithner’s Comments

Thursday, February 11th, 2010

Treasury Secretary Timothy Geithner was on “This Week” on Sunday and made various comments.  Here is the link:

http://abcnews.go.com/ThisWeek/week-transcript-treasury-secretary-timothy-geithner/story?id=9758951

I could make a lot of comments regarding this interview.

However, I would like to focus on this one exchange:

TAPPER: The Congress just voted to raise the debt ceiling to more than $14 trillion dollars. Moody’s, the bond rater, just said, quote, “unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture for the next decade will at some point put pressure on the triple-A government bond rating.

Is the United States going to lose its triple-A government bond rating? And what happens when the credit markets are no longer willing to buy U.S. debt?

GEITHNER: Absolutely not. And that will never happen to this country. And again, if you step back and look at what has happened throughout this crisis, when people were most worried about the stability of the world, they still found safety in Treasuries and the dollar. You’re still seeing that every time. People are reminded again about the many challenges you see around the world.

_____

my comments:

First, I don’t think any country can ever flatly deny the possibility of a credit downgrade.  As well, as I have previously commented, sovereign deficit and debt levels are coming under increased scrutiny.

Second, as far as the U.S. Dollar and Treasuries purportedly acting as “safe havens” during the crisis, and the inferences Geithner draws from this :

Although the U.S. Dollar and Treasuries increased in price during the height of the financial tumult, I don’t agree with the idea that this price increase can be viewed as an (implied) affirmation of our financial standing.  Many different factors played into the price increases of the U.S. Dollar and U.S. Treasuries during that period.  As such, I do not come to the same conclusion as does Treasury Secretary Geithner.

As well, I don’t believe that drawing inferences off of past price action is necessarily a strong predictor of the future, especially on an “all things considered” basis going forward.

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Bubbles

Wednesday, December 2nd, 2009

from the November 3 FOMC Minutes:

“Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period, including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations. While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks.”

 

from the book Meltdown, p8, by Thomas E. Woods, Jr.:

“The Fed’s policy of intervening in the economy to push interest rates lower than the market would have set them was the single greatest contributor to the crisis that continues to unfold before us.  Making cheap credit available for the asking does encourage excessive leverage, speculation, and indebtedness.” 

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As one can see from the above two quotes, there is a considerable difference in philosophies regarding the probability of prolonged low interest rates in creating asset bubbles.  The top quote is from the November 3 Federal Open Market Committee Minutes, while the quote below it from Tom Woods Jr. and seems to offer a concise view of the Austrian philosophy on the low interest rate matter.

The issue of whether the ultra-low interest rate environment that has been put in place has fomented asset bubbles is a critical one.  For background on this matter, the November 30 BusinessWeek had a story titled “Is the Fed Creating New Bubbles?” and can be found at this link:

http://www.businessweek.com/magazine/content/09_48/b4157022781639.htm

My opinion on the matter is that there are currently multiple bubbles that have formed across various asset classes.  They are of various sizes and “vintages.”  Asset bubbles that burst can of course cause tremendous economic damage.  Perhaps the best example of this is “bursting” of the housing bubble.

Some bubbles are harder to spot than others.  Bubbles, almost by definition, include irrational behavior, and therefore can be hard to predict both in their formation as well as their ultimate size.  There are many factors that can come into play in order to cause bubbles.

I have addressed my thoughts as to whether Gold is in a bubble in a November 20 post.   Another question, that is critical  to both investors and the economy, is whether U.S. Treasury securities, especially the 10 Year, is in a bubble.   I believe the answer to this is “yes.”  The reasoning for my opinion is rather lengthy and complex; however, the previous post (from November 30) represents some of my thought on the issue.

 

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