Wednesday, January 6, 2010

Have Any Interest In The Future Direction of Rates?

I do.  And, I'll bet you do, too.  Interest rates affect so many factors in our financial lives.  They determine our compensation for saving, affect our willingness to take risk, cause or deter us from borrowing or lending and many, many other decisions.

Currently, interest rates are embarassingly low.  For example, the 4-week Treasury Bill rate is a whopping .025%.  But don't worry.  If you only extend the maturity to 6 months, you'll receive a very generous 0.18%.  See?  No problem.

Now if you really have a strong stomach and can wait two years until your Treasury Note matures you can actually earn 1.09%.   Still not satisfied?   You can buy notes maturing in five years and get 2.65%.  If that doesn't float your boat, you can buy 10-year notes and receive 3.85%.  If that doesn't do it, you must be one major ingrate!

If you have the willingness to invest in Corporate Bonds, rated BAA by Moody's, you could receive 6.39%.
BAA is the lowest rating above "junk bonds", the type that default often.  Great risk/return profile, eh?

It would seem that the only direction interest rates can go is up, but before you conclude that, read further.

The National Debt exceeds $12 trillion!!  For every 1% across-the-board increase in rates, an additional $120 billion would be added to the budget deficit annually!  I contend, therefore, that rates will continue ridiculously low for a long, long, time, despite Fed Chairman Bernanke's suggestions that rate hikes are "on the table".   The very same man, who along with his predecessor Alan Greenspan, have succeeded in one thing only:  creating asset bubble upon asset bubble only to attempt to cure the very bubbles they created with the identical medicine which CAUSED the bubbles... low interest rates.  Ben Bernanke as "Time 's "Man of the Year"   Great choice!

Tomorrow, we'll take a peek at "Peak Oil".  If you don't know about "Peak Oil", I hope I have your interest piqued.  See ya then.

Marko's Take


  1. I agree we have to keep rates low for America's sake. My rhetorical question is though, might we be forced to raise rates to continue to capture foreign investors money? We owe many countries, especially China a boat load of debt and we're continuing to attempt to borrow more at every Treasury auction,. How can we continue to maintain their appetite unless we're offering something that makes their tummies growl? Let's face it, our credit rating at this point is teetering on "junk" status....

  2. Hi Nyselady! Very nice comment! Yep, I'd say we're kinda stuck. In my personal opinion, the dilemma you speak of will be resolved via the ongoing surreptious exchange of the greeback for hard assets such as Gold and Real Estate.
    The Chinese are very well aware of this and as we speak are buying up companies involed in worldwide production of "real goods" and hoarding them. Ultimately the dollar will far pretty far. My only hope is that we don't become the second Weimar Germany. I don't have a wheelbarrow and prefer not to have to purchase one.


  3. Where does inflation figure into all of this or does it? On one hand so many dollars are out there but then there is so little demand to purchase "stuff" as well. What do you think?

  4. Kevin:

    Excellent question. The inflation cooker is already reaching the boiling point. The fact that folks are reigning in spending is the ONLY reason we are not experiencing double-digit inflation. When people spend, the "velocity" of money increases. Velocity refers to the rate of turnover of money. Currently, velocity is very, very low. Eventually, IT will rise, inflation will accelerate, no one will be willing to purchase fixed rate cheapo bonds and our Friends at the FED will have delivered us another one of their brilliant surprises...a double dip HYPERINFLATIONARY Depression!


  5. It's hard to see velocity increasing, though, until the unemployment situation improves any, which is difficult to see on any reasonable horizon. BUT, you are right, it is THE statistic to be watching...

  6. DHH: I don't agree that velocity is contingent on employment although it would play a factor. I believe that the depreciation of the dollar will cause more people to try to "get out of dollars" and replace them with real goods. That phenomenon ought to raise velocity and start sparking the inflation spiral.



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