Tuesday, December 24, 2013

U.S. Treasury 10 Year: Interest Rate now above 2.9%






Interest rates have been climbing in recent weeks.  Rates may be reacting to the Federal Reserve Banks recently announced plan to decrease or taper monthly quantitative easing by $10B.  The Fed has been buying an average of $85B per month of US Treasuries and Mortgage Backed Securities during 2013.  The Fed plans to purchase "only" $75B per month going forward.

As a buyer of US Treasuries, the Fed creates additional demand which depresses interest rates.  To say it another way, the US Treasury would have to offer higher interest rates in order to entice more buyers if the Fed were not in the market.  The Fed's purchases are so significant that it currently owns 18.8% of all treasuries http://www.zerohedge.com/news/2013-12-04/feds-impersonation-hunt-brothers-continues

If interest rates continue to climb it will depress economic growth and employment.  Home and auto loans will be more expensive, for example.  And, a larger portion of the US Government's budget will be spent on interest servicing the debt instead of expenditures that grow the economy, such as salaries and fighter jets.  The Fed will likely not allow rates to increase much more for fear of hurting the economy.  Perhaps the Fed has another idea or name for injecting more money in the economy, but effectively taper plans will not be implemented.  Long live the taper.

It is difficult to understand why anyone would buy a US treasury bond if about a third of the issue is being purchased by the Fed.  No way buyers receive a fair price or interest rate while such a large, conflicted, insider is dominating the market.  Presumably buyers simply do not have anything better to do with their money.  They could invest it in equities, or real estate, or art, or classic cars!!  . . . which is exactly why these asset classes have appreciated dramatically over the last 2 years.  Precious metals are another investment option.  Central banks through the bullion banks have actively depressed gold prices to discourage precious metals as an alternative.  













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