Posted on 02/17/2010 1:49:55 PM PST by blam
The End of Low Interest Rates Is Near
Interest-Rates / US Interest Rates
Feb 17, 2010 - 03:40 PM
By: Francois Soto
Long Term Interest Rates To Double By 2020
We believe 10-Year U.S. Treasuries Government Yield is going to double over the next decade to eventually reach 10% by 2020. This prediction seems quite nonsensical as interest rates are hovering at their lowest level but secular financial environment changes occur most of the time when market participants are expecting it the least... And this might just be the case with long term interest rates!
This forecast is based on our demographic model seen below. When the red line increases, the proportion of "retirees" rises faster than "high savers" causing government debt to expand due to additional healthcare and pension spending while shifting the demand/supply dynamics of source capital. The corollary is also true. This relationship displays an astounding 0.91 correlation since 1960.
Fixed income investors may have to deal with subpar returns over the next decade. Furthermore, this may squeeze market premium causing equity expected returns to decline causing major indices to move sideways for the next decade in a similar fashion when the Dow Jones touched 1000 points in 1966 to only break the 1000 points psychological barrier in 1981 after many large up-down movements.
Short Term Interest Rates To Increase By Q4 2010 Long term interest rates already increased since they reached their abysmal level in December 2008. The next intuitive question is: When short term interest rates are going to increase then? Effectively, the 3- Month U.S. Treasuries Government Yield was still quoted at a paltry 0.07% as of January 2010.
The answer lies within a simple observation: Over the last three decades, the Fed decided to increase the Fed Fund rate only when unemployment rate fell from a high level. This can be seen on the chart below. Once this occurs, there is usually a 3-12 months lag before interest rates moves upward.
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When the bottom really falls out interest rates will be near zero. Think japan.
I’m out of the borrowing business, anyway. Higher interest rates are good when you’re not borrowing money — it makes saving more profitable.
SnakeDoc
The Fed can not raise rates. They will be raised by the market when nobody buys the worthless T-Bills.
Our income is solely interest....this has been killing us, and making us almost remember Jimmuh Carter with fondness.
There will be mandatory negative intrest loans by the time this bunch is done.
Men who lend capital wish it earned huge returns without taking any credit risk, but it simply is not worth that much.
Every past period in which the real after tax return to lenders at risk free rates, has grown to substantial levels, has been immediately followed by widespread default. Expectations of high real returns merely for saving, rather than for taking real economic risks and being right about them, are illusions.
Since 1988, the Fed has held M1 growth to less than 4% per year, on average, including the recent one-time spike at the end of 2008. This is 3.5% a year slower than the growth rate of broad money, total assets, and 3% slower than the average growth of nominal GDP. That is why inflation has fallen over that stretch, and both inflation expectations and real interest rates have been crushed.
The Fed has not been and is not now, overly loose. There is no inflation and no prospect of any in the immediate future. (Markets agree, the 5 years TIPS show expected inflation over the next 5 years is 7% overall, less than 1.5% per year, which is half the long run average or less). There is no prospect of double digit interest rates on treasuries. It is pure fantasy.
btt
Opinions are like a$$holes....
yabbut watch this.... if this holds, what will the interest be on omamdebt that future generations inherit? All that “stimulus” money?
Guaranteed to destroy America!
The only thing that returns zero is a completely federally insured short term "bunker" form of savings.
True.
Those who depend on interest-bearing savings are getting shafted.
Those who looking to buy homes, etc., are finding excellent rates.
In 1998, I had a money market account that was paying a ‘moderately low’ 8%. I wish I had that now. Currently, I am lucky to get 2% for bank CDs.
Me too. My C.U. is offering a laughable .4% interest on savings (note the decimal point). I keep just enough in it to keep it open. Money market account is not much better or C.D.s either.
No Sabe. I don’t understand all these economical gyrations. I just know how to add and subtract and divide...It ain’t adding up! This house of cards is a comin down baby!
Interest rates have to rise. Only then will this dam finally get broken.
I think so but they can not. All the scammer banks have lent Trillions at low rates.
Ok, the free money refloated the banks. It is safe to raise interest rates. It won’t kill the economy, but the banks still want the free money. Very frustrating.
Clearly. So stop there.
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