Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Johnson Vs Gove Tory Leadership Contest Grudge Match Betfair Betting - 17th June 19
Nasdaq Stock Index Prediction System Is Telling Us A Very Different Story - 17th June 19
King Dollar Rides Higher Creating Pressures On Foreign Economies - 17th June 19
Land Rover Discovery Sport Tailgate Not Working Problems Fix (70) - 17th June 19
Stock Market Outlook: is the S&P today just like 2007 or 2016? - 17th June 19
US China War - Thucydides Trap and gold - 16th June 19
Gold Stocks Bull Upleg Mounting - 16th June 19
Gold Price Seasonal Trend Analysis - Video - 16th June 19
Fethiye Market Fruit, Veg, Spices and Turkish Delight Tourist Shopping - 16th June 19
US Dollar Gold Trend Analysis - 15th June 19
Gold Stocks “Launch” is in Line With Fundamentals - 15th June 19
The Rise of Silver and Major Economic Decline - 15th June 19
Fire Insurance Claims: What Are the Things a Fire Claim Adjuster Does? - 15th June 19
How To Find A Trustworthy Casino? - 15th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match - Video - 14th June 19
Gold and Silver, Precious Metals: T-Minus 3 Seconds To Liftoff! - 14th June 19
Silver Investing Trend Analysis - Video - 14th June 19
The American Dream Is Alive and Well - in China - 14th June 19
Keeping the Online Gaming Industry in Line - 14th June 19
How Acquisitions Affect Global Stocks - 14th June 19
Please Don’t Buy the Dip in Nvidia or Other Chip Stocks - 14th June 19
A Big Thing in Investor Education is Explainer Videos - 14th June 19
IRAN - The Next American War - 13th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match Contest - 13th June 19
Top Best VPN Services You Can Choose For Your iPhone - 13th June 19
Tory Leadership Contest Betting Markets Forecast - Betfair - 13th June 19
US Stock Market Setting Up A Pennant Formation - 13th June 19
Which Stocks Will Lead The Cannabis Rebound? - 13th June 19
The Privatization of US Indo-Pacific Vision - Project 2049, Armitage, Budget Ploys and Taiwan Nexus - 12th June 19
Gold Price Breaks to the Upside - 12th June 19
Top Publicly Traded Casino Company Stocks for 2019 - 12th June 19
Silver Investing Trend Analysis - 12th June 19
Why Blue-Chip Dividend Stocks Aren’t as Safe as You Think - 12th June 19
Technical Analysis Shows Aug/Sept Stock Market Top Pattern Should Form - 12th June 19
FTSE 100: A Top European Index - 12th June 19
Gold Surprise! - 11th June 19
How Forex Indicators are Getting Even More Attention in the Market? - 11th June 19
Stock Market Storm Clouds on the Horizon - 11th June 19
Is Your Financial Security Based On A Double Aberration? - 11th June 19
What If Stocks Are Wrong About Interest Rate Cuts? - 11th June 19
US House Prices Yield Curve, Debt, QE4EVER! - 11th June 19
Natural Gas Moves Into Basing Zone - 11th June 19
U.S. Dollar Stall is Good for Commodities - 11th June 19
Fed Running Out of Time and Conventional Weapons - 11th June 19
Trade Wars Propelling Stock Markets to New Highs - 11th June 19
Best Travel Bags for Summer Holidays 2019, Back Sling packs, water proof, money belt, tactical - 11th June 19
Betting on Next British Prime Minister Tory Leadership Betfair Markets Forecast - 10th June 19
How Can Stock Market Go Up When We’re Headed Towards a Recession? - 10th June 19
If You Invest in Dividend Stocks, Do This to Double Your Returns - 10th June 19
Reasons for the Success of the Dating Market - 10th June 19
Gold Price Trend Analysis - Video - 10th June 19
US Stock Markets Rally Hard – Could Another Big Upside Leg Begin? - 10th June 19
Stock Market Huge Cosmic Cluster Ahead: Buckle Up! - 10th June 19
Stock Market Higher To Go? - 10th June 19
The Gold Price Golden Neckline… - 10th June 19
Gold Price Seasonal Trend Analysis - 9th June 19
The Fed Stops Pretending - 9th June 19
Fed Rate Cuts Soon; Bitcoin Enthusiasts Join Wall Street in Bashing Gold - 9th June 19
1990s vs. 2010s - Which Expansion Will be Better for Gold? - 9th June 19
Gold Price Trend Analysis, MACD, Trend Channels, Support / Resistance - 8th June 19
Gold Surges Near Breakout - 8th June 19
Could Gold Rally Above $3750 Before December 2019? - 8th June 19
5 Big Lies About Precious Metals Investing Exposed - 8th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

Beware of Floating Interest Rates

Interest-Rates / US Interest Rates Oct 26, 2011 - 11:07 AM GMT

By: Neeraj_Chaudhary

Interest-Rates

Best Financial Markets Analysis ArticleAccording to US government figures, the yield on the 10-Year US Treasury note reached a record low of 1.72% last month. Thus, despite the fact that government debt has exploded at a rate of more than $1 trillion per year, and the fact that S&P recently downgraded US debt, it appears that market demand for long-term US debt is nearly insatiable.


But in order to explain this seemingly irrational demand, some economists have suggested that bond buyers are preparing for a decade's long Japan-style deflationary era here in the US. In Japan, rates have been stuck below 2% for the better part of a generation. In such an environment, where economic malaise sucks the life out of stocks and other investments, ultra low interest rates are not enough to dissuade safety-seeking investors.

And yet, behind the scenes, private buyers may not be planning for lower long-term rates. Instead, they may be concerned that instead of falling, US interest rates will rise. If they do, investors who buy in at current levels, especially for longer maturity debt, could realize significant losses in their bond portfolios. That's because existing low yielding bonds fall in price when yields rise.

In February of this year, the Treasury Borrowing Advisory Committee (TBAC) - a group of banks that deals directly with the Fed, which includes JP Morgan Chase, Goldman Sachs, Bank of America, and other major financial institutions - asked the US Treasury to offer floating rate notes. This month - while US interest rates hovered near all-time lows - the Treasury agreed to consider the Committee's proposal.

Floating rate debt instruments reset periodically (often quarterly) in response to market rates. As a result, they can offer enhanced yield in a rising interest rate environment, which should provide greater price protection to buyers.

All things being equal, governments have no motive to offer floating rate notes. They would rather simply keep costs low by issuing a bond at current market rates, and then pay back the interest and principal on the agreed-upon schedule. Locking in low interest rates is one of the best incentives for governments to maintain a healthy balance sheet. It is the buyers of debt, who - concerned about the possibility for portfolio losses - seek to impose additional conditions before they are willing to loan.

So although the US government can at present issue 10-year notes at record low interest rates, private buyers are discreetly pushing for protection against rising interest rates. These buyers may be indicating their deep concern about the government's finances, and the distinct possibility that rates will in fact rise.

Incidentally, these are not just any buyers. In addition to buying government debt for their own accounts, TBAC members represent other major buyers such as banks, insurance companies, and pension funds, and also foreign investors who in recent years have bought as much as 50% of US debt.

In our 200+ year history - including the periods of World Wars One and Two, the Great Depression, and the inflationary period of the 1970s - the US Treasury has never offered floating rate notes. The mere fact that the US may go down this road should send a chill. Such an outcome should not inspire confidence in the world's largest bond issuer.

It is no accident that the governments in recent history that have been forced to issue floating rate paper read like a Who's Who of fiscal mismanagement and hyperinflation: Argentina during the mid-80s, Brazil during the mid-90s, Mexico and Thailand in the late 1990s, Venezuela throughout the 1980s and 1990s, etc. In fact, during the 1980s (in the wake of the Third World Debt Crisis), there was a period during which more than one in three new issues in the international bond market were of the floating rate variety.

Low US interest rates have lulled some into a false sense of complacency, believing that these yields indicate clear sailing in the US bond market. But even the most casual observer of economic conditions must acknowledge that no one - not an individual, a business or a government - can borrow nearly 10% of his income every year forever without any consequences.

We continue to believe that the United States is going down a path that will end in a bond market and currency crisis. And unless we change course, the consequences for every American citizen and every foreign holder of US debt may be severe.

Source: Yahoo Finance. CBOE Interest Rate 10-Year T-Note from October 2010 - October 2011.

For full access to the remaining articles in The Euro Pacific Global Investor Newsletter, please click hereto subscribe. For an in-depth look at the prospects of international currencies, download Peter Schiff's and Axel Merk's Five Favorite Currencies for the Next Five Years. Be sure to pick up a copy of Peter Schiff's just-released economic fable, How an Economy Grows and Why It Crashes. Click here to learn more and order.


Neeraj Chaudhary is an Investment Consultant with Euro Pacific Capital. Opinions expressed are those of the writer and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

Copyright © 2011 Euro Pacific Capital, Inc.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules