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I am a quant/gearhead with a strong interest in the markets due to the current financial crisis. As I have seen the crisis unfold, I have come to see what I feel are some of the root causes of the crisis, at least from an American perspective. Some of these include the failure of economics... More
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Numerical Alchemy, Inc.
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  • Up, Up, And Away: Why Interest Rates Will Continue to Rise 2 comments
    Jun 23, 2009 06:33 PM

    Anyone looking at interest rates recently must be wondering why they keep going up.  This begs the question will rates continue to increase or will they go back down?  Well, if we look at Treasuries, things don’t bode so well:

     

    Short term treasuries are at rates near the effective zero interest rate bound.  However, rates on 5 year to 30 year Treasuries have been steadily climbing since the beginning of the year effectively steepening the yield curve.  Based on my forecasts (using ARIMA modeling), I anticipate the spread (i.e. the difference in rates) between the 30 year and 1 month Treasuries to continue to increase for the foreseeable future.

     

    Given that governments around the world are borrowing to fund their own “stimulus” plans, the cost of borrowing longer term is increasing for everyone, consumers, businesses, and governments alike, due to increased competition for available funds.  However, no one is willing to lock up their money for an extended period due to increased risk (i.e. getting your money back at all),  inflation fears (i.e. if you are earning 4% on a long term bond and inflation jumps to 10%, you’re screwed), and need for liquidity.  Everyone from central banks to wealthy consumers are putting their money into short term U.S. Treasuries.  Despite all the hype and fear mongering around the dollar, U.S. short term debt is still the safest investment on the planet outside of precious metals.   This is what is keeping short term rates low while increasing the rates on longer term debt as Uncle Sam tries to attract more funds into longer term issues .  So, what does all this mean?  Interest rates on everything from credit cards to home mortgages are headed north.  Have an ARM about to reset?  Get ready for a rate hike.  This also means putting the brakes on an already weak U.S. economy effectively stifling a full recovery.  So much for all the green shoots.

    Disclosure: no positions

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This post has 2 comments:

  •  
    Good blog, based on facts. Interests rates will go up and we will have inflation. I bought a digital photo frame a month ago when Amazon had them on "special". Now the stocks have run out and they have to import more, the price has nearly doubled. It is a good time to buy consumer goods before current stocks run out. Soon prices of consumer goods will rocket, hopefully for us in the UK we can still produce some of our own food and if food inflation and energy inflation is low then the poor won't get hit too hard. My bank is American and doing sub-prime credit cards at 34.9% which is legal loan sharking. My card as an established customer is around 8% and if it went high I would cut it up! The savings division was paying 5.9% now down to just 0.4% and is being sold off to a British building society. They aren't short of funds in banks, just short of brains and they are still greedy for profits. An old fashioned building society that is still mutual taking over the assets of a multinational bank - now there is food for thought!
    2009 Jun 24 05:24 AM Reply
  •  
    Good blog, based on facts. Interests rates will go up and we will have inflation. I bought a digital photo frame a month ago when Amazon had them on "special". Now the stocks have run out and they have to import more, the price has nearly doubled. It is a good time to buy consumer goods before current stocks run out. Soon prices of consumer goods will rocket, hopefully for us in the UK we can still produce some of our own food and if food inflation and energy inflation is low then the poor won't get hit too hard. My bank is American and doing sub-prime credit cards at 34.9% which is legal loan sharking. My card as an established customer is around 8% and if it went high I would cut it up! The savings division was paying 5.9% now down to just 0.4% and is being sold off to a British building society. They aren't short of funds in banks, just short of brains and they are still greedy for profits. An old fashioned building society that is still mutual taking over the assets of a multinational bank - now there is food for thought!
    2009 Jun 24 05:24 AM Reply
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