Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Investing in the METAVERSE Stocks Universe - 8th Dec 21
Stock Market Sentiment Speaks: I Expect 15-20% Returns For 2022 - 8th Dec 21
US Dollar Still Has the Green Light - 8th Dec 21
Stock Market Topping Process Roadmap - 8th Dec 21
The Lithium Breakthrough That Could Transform The Mining Industry - 8th Dec 21
VR and Gaming Becomes the Metaverse - 7th Dec 21
How to Read Your Smart Meter - Economy 7, Day and Night Rate Readings SMETS2 EDF - 7th Dec 21
For Profit or for Loss: 4 Tips for Selling ASX Shares - 7th Dec 21
INTEL Bargain Teck Stocks Trading at 15.5% Discount Sale - 7th Dec 21
US Bonds Yield Curve is not currently an inflationist’s friend - 7th Dec 21
Omicron COVID Variant-Possible Strong Stock Market INDU & TRAN Rally - 7th Dec 21
The New Tech That Could Take Tesla To $2 Trillion - 7th Dec 21
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

What Causes Interest Rates to Rise

Interest-Rates / US Interest Rates Mar 28, 2012 - 10:18 AM GMT

By: Michael_Pento

Interest-Rates The prevailing notion among the main stream media and economists is that interest rates are rising because of improving economic growth. But like many of the readily accepted tenets of today’s world of popular finance, this too has its basis in fallacy.

Interest rates have increased by nearly 40 basis points on the Ten year note since the first week of March and that is being offered as proof that the economy has healed and GDP growth is about to accelerate. But in truth, the recent spike in Treasury bond yields is only the result of a temporary ebbing in the fear trade that brought about panic selling in Euro denominated debt, which had previously caused U.S. Treasury prices to soar.

The head of the European Central Bank, Mario Draghi, just finished printing over a trillion Euros in an effort to calm the bond market. This new liquidity predictably found its way into distressed Eurozone debt and has mollified bond investors; for the moment. Since a Greek exit from the Euro in no longer perceived an imminent threat, investors have sold their recent purchases of U.S. Treasuries and piled back into Eurozone sovereign debt. For example, the yield on the Italian 10 year note took a rollercoaster ride above 7% at the start of this year, before plunging south of 5% by the beginning of March.

However, in contrast to what passes for the economic wisdom of today, an increase in the rate of sovereign bond yields would be a function of deterioration in their credit, currency and inflation risks. But it would never be because of an increase in the prospects for growth. An economy that is experiencing a healthy growth spurt would experience a reduction in all three of those factors that would cause bond yields to rise. Strong GDP growth—which results from increased productivity--serves to improve credit risk, due to a bolstered tax base, while it also lowers the rate of inflation by increasing the amount of goods and services available for purchase. Therefore, it also tends to boost the currency’s exchange rate as well.

Economic growth that is also accompanied by a sound monetary policy tends to lower the rate of inflation and thus increases the real rate of interest. But it does this without increasing nominal interest rates. It instead serves to provide a higher real rate of return on sovereign debt ownership.

This is precisely what occurred in the U.S. during the early 1980’s. After Fed Chairman Paul Volcker fought and won the battle against inflation, economic growth exploded while the stock market soared in value. And nominal bond prices began to fall, not rise. At the start of the 1908’s, GDP fell by 0.3%, the Ten year note was 12% and the rate of inflation was 14%. Therefore, real interest rates were a negative 2% at the start of that decade. But by 1984 GDP had accelerated to 7.2% in that year. However, the nominal Ten year note fell to 11% and inflation had plummeted down to 4%. In this classic example that illustrates clearly how growth isn’t inflationary; real interest rates soared by 9 percentage points to yield a positive 7% return on sovereign debt! In a healthy economy; stocks, bond prices and the currency should all rise together as nominal yields fall and real interest rates rise. The simple truth is that the rate of inflation should fall faster than the rate nominal yields decrease.

However, what the Fed, ECB and BOJ are doing now provides a prescription for soaring nominal interest rates in the not too distant future. These central banks are violating all three conditions that lead to low and stable interest rates for the long term. By massively increasing the money supply, they have caused inflation to rise and reduced the purchasing power of their currencies. And by creating superfluous money and credit, the central banks have given the cover needed for their respective governments to run up an overwhelming amount of debt. The currency, credit and inflation risk of owning those three sovereign debt markets has soared. Therefore, they have created the perfect conditions for a collapse of their bond markets.

Central bankers believe they have more power and influence over the yield curve than what they indeed posses. The fact is they can only control interest rates for a relatively short period of time. By not allowing interest rates to function freely, the Fed, ECB and BOJ are facing the eventuality of a bond market debacle that will also crush their currencies and stock markets. Recent history has proven that these central banks will fight the ensuing run-up in yields with QEs III, IV and V in an effort to postpone the pain. This failure to acknowledge reality will cause the eventual collapse to become significantly more acute.

Michael Pento
Pento Portfolio Strategies
(O) 732-203-1333
(M) 732- 213-1295

Mr. Michael Pento is the President of Pento Portfolio Strategies and serves as Senior Market Analyst for Baltimore-based research firm Agora Financial.

Pento Portfolio Strategies provides strategic advice and research for institutional clients. Agora Financial publishes award-winning newsletters, critically acclaimed feature documentaries and international best-selling books.

Mr. Pento is a well-established specialist in the Austrian School of economics and a regular guest on CNBC, Bloomberg, FOX Business News and other national media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to and is a blogger at the Huffington Post.

Prior to starting Pento Portfolio Strategies and joining Agora Financial, Mr. Pento served as a senior economist and vice president of the managed products division of another financial firm. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors.

Additionally, Mr. Pento has worked for an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street. Earlier in his career Mr. Pento spent two years on the floor of the New York Stock Exchange. He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Mr. Pento graduated from Rowan University in 1991.

© 2012 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2019 - 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