No one can seem to come up with a logical explanation why the bond market continues to sell-off. Sure, there has been speculation that foreign central banks would be raising rates later this year, and higher foreign yields would provide competition for our debt. But, is there more that we don稚 know about?
Last week, I made mention that Iran had plans to open a competing oil trading exchange in competition to the New York Mercantile Exchange. I also said that 澱oth China and Japan will welcome the Iranian exchange in order to diversify their nation's investments away from dollars into other currencies. If, and when this happens, longer term interest rates in the U.S. could begin to rise.�
But what if other nations around the world begin lightening their load of US debt? Could this be what is happening?
This should come as no surprise, but given the turmoil in the Middle East, Syria痴 state owned bank recently dumped its US dollar reserves for Euros. This is a smart move by the Syrian痴, especially if they decided to get involved in any potential military action in the region. They are probably aware that their US assets could be frozen.
But like anything else, we will not know for sure that foreign countries like China or anyone else is selling our debt until it痴 too late.
As I scan over the interest rate landscape, Treasuries have fallen for four consecutive sessions, and the bond market is very weak.
As you scan the rates on Bloomberg (Click on 澱ond market� in blue), you値l noticed that the loan sharks have raised to Prime Rate to 7.50%. I don稚 really know why they name this rate 菟rime� since the rate they charge consumers is 66% higher than the Fed Funds Rate, and 36% higher than the Discount Rate.
The Prime Rate consumers are paying on lines of credit, etc, is nothing more than legalized loan sharking.
In January 2004, I was criticized when I said:
典he rise in interest rates from historically low levels is a good a sign that the economy is recovering. I think interest rates will continue to rise over the next year or so with the shorter maturities seeing the biggest jump in yields. Historically, the long bond (30 yr. treasury) should settle in at 5.5-6.0% over the next 18- 24 months.�
I know I was early on my call for higher rates, but if you understand that foreign nations actually control our longer term interest rate scenario, anything and everything is a possibility.
