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Global Interest Rate Hiking Cycle Gathers Steam; What to Do …

Interest-Rates / US Interest Rates Dec 31, 2010 - 08:47 AM GMT

By: Mike_Larson

Interest-Rates

Best Financial Markets Analysis ArticleNot a creature was stirring, not even a mouse, here in the U.S. markets late last week. But on Christmas Day, China’s central bank shocked investors …

Specifically, the People’s Bank of China raised short-term interest rates for the second time in the past three months.


The 25 basis point hike to 5.81 percent in the benchmark one-year lending rate effectively puts the world on notice that China is more concerned about pricing pressure than it has been in a long, long time. And for good reason: Chinese inflation surged to a 28-month high of 5.1 percent in November.

China is hardly alone in this shift toward higher rates. Other central banks around the world are trying like crazy to combat inflation and the negative side effects of easy money.

Just consider how …

Rates Are Rising Worldwide!

Malaysia started raising rates in March. Its overnight policy rate now stands at 2.75 percent after three hikes. Elsewhere in Southeast Asia, Taiwan started raising its discount rate in June, while South Korea has boosted its benchmark rate twice since July.

The global money war is intensifying.
The global money war is intensifying.

New Zealand has only hiked rates twice since June. But Australia has jacked rates up seven times to 4.75 percent, while the Reserve Bank of India has raised rates six times since March to 6.25 percent.

In Europe, concern over the heavily indebted “PIIGS” countries has kept the European Central Bank on hold. But Sweden’s Riskbank has raised rates four times to 1.25 percent since July, while Norway has hiked its rates three times in the past 14 months.

And what about South America?

Brazil has boosted its benchmark short-term rate by 200 basis points to 10.75 percent, with another 100 to 200 points worth of hikes likely in 2011. Chile has more than tripled rates to 3.25 percent from 1 percent in only six months, while Peru has increased rates five times since May.

In other words, the global money war I’ve been talking about for some time is intensifying! Smaller nations around the world are raising rates, and now, the 800-pound gorilla — China — is following suit.

Meanwhile, the …

Fed Is Still Sitting on Its Hands as Money War Heats Up

The only glaring exceptions? The so-called “developed” economies — Japan, the U.S., and “core” Europe. Unlike their “emerging” market neighbors, they’re weighed down with too much debt, too little growth, and too much short-sightedness by policymakers.

The Fed refuses to budge.
The Fed refuses to budge.

Indeed, despite rising inflation pressure … better economic news … and a backfiring QE2 program, the U.S. Federal Reserve has signaled plans to leave rates pegged near 0 percent until the sun exhausts its fuel in, oh, about 5 billion years.

The relative imbalance between U.S. rates and rates in many foreign countries is keeping the pressure on the dollar. It’s also juicing commodity and gold prices.

Most importantly, the Fed’s intransience is forcing longer-term bond investors to take matters into their OWN hands. They’re dumping Treasury bonds hand-over-fist, leading to the worst rout for long bonds in 18 months.

My recommended course of action?

First, hedge against bond price declines by using ETFs that rise in value as Treasuries fall.

Second, keep your fixed-income money in shorter-term ETFs or mutual funds rather than longer-term ones to avoid big potential losses. That means something like the iShares Barclays 1-3 Year Treasury Bond Fund (SHY) rather than the Vanguard Extended Duration Treasury ETF (EDV).

Third, keep your eye on the speed and magnitude of the increase. Should the rate rout accelerate and worsen, it could be a real headwind for stock prices.

And fourth? Have a fantastic New Year! I’m looking forward to helping you make 2011 your most profitable yet.

Until next time,

Mike

P.S. This week on Money and Markets TV, I was joined by other Weiss analysts for a look back at some of the biggest market-moving stories of 2010. And we offered practical advice for protecting your money and turning a profit in any market condition.

If you missed last night’s episode of Money and Markets TV — or would like to see it again at your convenience — it’s now available at www.weissmoneynetwork.com.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


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