Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Are US Interest Rates Fated to Rise?

Interest-Rates / US Interest Rates Mar 12, 2008 - 05:08 AM GMT

By: Greg_Silberman

Interest-Rates Best Financial Markets Analysis ArticleThere is one path in investing that is sure to lead to ruin. It's a dangerous path because it lacks one critical ingredient for success – thought! The path we are speaking about is called “following the consensus”.

It is both intellectually and emotionally easy to follow a majority of bullish analysts. Unfortunately the ‘consensus' is seldom right and hardly ever leads to BIG profits.


The consensus today is that the stock market is risky and treasury bonds of all maturities are safe.

but just how safe are treasuries?

Consider the following:

1. Commodities are surging ahead which is a surefire sign of inflation and higher rates.

2. Money Supply the world over is gushing out as central bankers try to pump up their economies. The positive correlation between MS and price inflation and interest rates is overwhelming!

3. Long-dated Treasury Bonds are at generational lows and short-dated rates are practically zero. Real rates are negative and penalize savings. Can interest rates go much lower?

4. If the US Dollar continues to fall China and the rest of the World won't hold treasuries for much longer. Unless rates rise to protect the Dollar, the inevitable consequence will be wholesale dumping.

Another consensus view is that we are heading into a period comparable to the 1970s. Stagflation. However we have problems with that view too:

Chart 1 - 30yr yields 1940 to today

Courtesy chartrus

For one - Long-term interest rates were already rising in the 50s and the 60s before commodities or price inflation really got going in the 70s. Contrast that with today where interest rates have been falling precipitously for 2 decades.

Another thing that worries us about a comparison with the 1970s is wages. Wage inflation increased sharply in the mid- to late-1960s, from around 3 percent per year to seven percent and then finally 9% in 1980. Wage Inflation is completely absent today which is surely attributable to cheap labour in emerging countries and the Internet.

Whilst there are similarities with the 70s, we don't think the comparison is apt.

Here's another reason we think something different is going on rather than plain ‘ol vanilla monetary inflation:

Chart 2 - Various Bond ETF returns over 6-months

The above chart shows the performance of various fixed income ETFs over the last 6-months. Admittedly the worst 6 months in fixed income markets for many years.

Excluding dividends (the ETF pays interest from the underlying bond) the following returns have been achieved:

TFI – Municipal Bonds (minus) –1% (yield 3.8%)

LQD – Investment Grade Corporate Bonds –1% (yield 5.7%)

IEF – 7-10yr Treasuries 6.65% (yield 3.7%)

MBB – Mortgage Backed Securities 2.82% (yields 3.4%)

TIP – Treasury Inflation Protected Bonds 7.87% (yields 5.6%)

SHY – 1-3yr Treasuries 4.89% (yields 2.3%)

Hardly returns from a collapsing market!

TIPs have admittedly performed best so inflation concerns are entering the market, but what surprised us most is the decent returns on the ‘dismal' segments of the market: corporates, muni's and mortgage backed securities. Even the worst category of bonds have benefited from lower interest rates.

The one thing that has changed is the blow out in spreads. The price of default risk has sky rocketed whilst the underlying cost of debt has not.

Our view is that we are entering a period of wholesale debt deflation and that is why assets with very little credit risk such as Gold and Oil and even Treasuries are being marked up.

However, regarding treasuries, they are backed by central bankers hell bent on debasing their currency to prevent debt deflation. Given a little more time and a little more pain, the consensus will realize that Treasuries are not a good hiding place at all. The bond bubble will ultimately get pricked and interest rates move much higher.

More commentary and stock picks follow for subscribers…

By Greg Silberman CFA, CA(SA)
Profession: Portfolio Manager and Research Analyst
Company: Ritterband Investment Management LLC
e-Mail: greg@goldandoilstocks.com
Website: blog.goldandoilstocks.com

I am an investor and newsletter writer specializing in Junior Mining and Energy Stocks and small caps listed in the US, Canada and Australia.

Please visit my website for a free trial to my newsletter http://blog.goldandoilstocks.com

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.  

Greg Silberman Archive

© 2005-2022 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