Here's the chart for long term US interest rates over the last ten years from fixedincomeinvestor.com:
The recent increase doesn't look too spectacular, interest rates are still very low in historical terms although you might fear/expect/hope that they'd go back up to three or four per cent in the next year or so.
What looks a bit more spectacular is the price of US Treasury bonds (futures price from ifsmarketcenter.com).
When interest rates go up, then bond prices go down - which has fallen by about ten per cent in the last two months. That's a heck of a loss from a supposedly safe investment:
Everybody is explaining this/blaming this on the fact that Bernanke hinted that he might slow down the pace of QE if the economy starts picking up a bit.
In other words he has not said he is going to reverse QE, he has not suggested that he will stop QE, he merely hinted that he would reduce the monthly amount of QE if x, y and z happens.
That's how fragile all this is. And with bit of luck, when America finally sneezes, Britain will catch cold and interest rates will go up to something sensible again, like 2% above inflation.
A grim document
8 hours ago
7 comments:
There's a HUGE bond bubble just waiting to burst. I think (but I do not know) that sovereign debt is more vulnerable than corporate debt.
FYI there appears never to be enough additional reward for the risk for bonds with greater duration to maturity of about 2 years. Quite why various insurers and others have bought 50 year Treasuries on current terms defeats me.
That would just about finish any notion of a 'recovery' in its tracks.
The US is yet to feel the effects of the sequester in any case but if interest rates were to rise to that level with current debt loads there would be a high risk of a sharp recession in its wake. Just before the next election.
L, that's what I think, but I've been saying it for years and it still hasn't happened.
PC, as a net saver and non-land owner, I think that interest rate hikes are a good thing. I'm not sure if it would finish off the recovery. There are plenty of businesses and plenty of workers who are also net savers and non-landowners.
The net savers amongst us will be the ones bailing out the net (over)borrowers who've pigged out on low mortgage rates to overpay for houses / take out equity, and who won't be able to afford their mortgages if rates go up. We're hard working, hard-pressed families! We can't afford our mortgages! It's not fair! No one told us rates could go back up!
FT, when you say "the net savers will be the ones" don't you mean "the net savers ARE the ones"?
And it's not just the "net savers" picking up the tab, it's the working taxpayers as well (with or without savings).
MW - We will have a new bust. But it will be worse than 2008. Household debt is nearly as high, off just a few percent. But wages are lower and with real interest rates (not the QE fied ones, the Wonga ones...) already high they will sky rocket. All heavily indebted families, including mine, will be completely buggered. The banks will be really buggered, especially that basket case Lloyds, as reposessions take hold. then property prices will start to fall, accenuating the bust. the Government has already spent all its real money so will only be able to help through massive currency debasement.
So your savings and pension will be worth feck all too.
We are all ruined. Bugger.
MW - well, that's two of us banging on about it. I bet the Fucking Catastrophe Authority and the Bank have no clue though. They didn't the last time.
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