Wednesday, April 16, 2014 07:29pm
North Adams, MA now: 37 °   
Send news, tips, press releases and questions to info@iBerkshires.com
The Berkshires online guide to events, news and Berkshire County community information.
SIGN IN | REGISTER NOW   

Home About Archives RSS Feed
The Independent Investor: Why Are Interest Rates Rising?
By: Bill Schmick On: 04:56PM / Thursday December 16, 2010
Important
0
Interesting
0
Funny
0
Awesome
0
Infuriating
0
Ridiculous
0

U.S. Treasury bond interest rates are rising. Since August, the yield on the 30-year bond has risen over one percent, the 10-year is up 118 basis points and the five year is up 102 basis points. For those unfamiliar with the government bond market these are moves akin to the stock market rising 50 percent.

It wasn't supposed to happen this way. The Federal Reserve Bank's second quantitative easing (QEII) was meant to keep interest rates low, provide even more liquidity to the markets and, hopefully, convince banks to lend more to cash-strapped consumers — or so we thought. The opposite appears to be happening.

This is a positive development in my opinion. Here's why:

When an economy moves out of recession and into recovery, one of the first things that happens is interest rates begin to rise. This occurs for a variety of reasons. Investors, for example, are willing to take on more risk. During recessions (including this one) investors normally keep their money in safe investments such as U.S. Treasury bonds. As the data indicates that the economy is beginning to grow again (as it is now), investors sell their bonds and buy stocks as they take on more risk and look for higher rates of return.

Bondholders also worry about the potential for inflation as the economy heats up. There is a lot of historical evidence that inflation begins to rise as the economy grows. Bond prices usually decline and yields rise to compensate for that expected increase in inflation. The point is, that after months of worrying whether the economy will fall back into recession or simply bump along the bottom, this rise in U.S. Treasury bond yields is living proof that the economy is finally growing again and at a rate that convinces investors to sell their bonds and buy stocks.

Now not all bonds should be sold simply because interest rates on Treasury bonds are moving higher. Rising rates are actually a positive for a wide variety of bond investments such as corporate and high yield corporate bonds (called junk bonds). Many of these bonds actually do quite well. That's because with economic-growth investors are more confident that these corporate-bond issuers will be able to service their interest payments and actually pay off their debts. Investors actually see the price of these bond issues move higher.

There is also a supply and demand explanation for rising yields. During the last two years an enormous number of investors have fled to the safety of U.S. Treasuries. Suffering steep losses in the stock market because of the financial crisis, trillions of dollars were invested in Treasuries with no regard to the rate of return on these bonds. Now that the clouds are lifting and the coast is a bit clearer, these same investors are beginning to cash out of bonds. The problem is that everyone is heading for the exit door at the same time.

This year, when the rumors of a possible QE II started to surface, aggressive traders jumped into the Treasury markets with both feet. By the end of August, according to Greenwich & Associates, hedge funds accounted for 20 percent (versus 3 percent in 2009) of the daily trading volume in the $10 trillion U.S. Government Bond market. Following them in were armies of speculators, both here and abroad, all eager to "buy the rumor" of another monetary expansion by the Fed.

Now that QE II has occurred, we are experiencing a classic "sell on the news" exodus from that market at the same time that longer-term bond investors are also selling. This provides a simple explanation for the truly astounding 44.75 percent jump in yields that have occurred in just over two months.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.



0Comments
Tags: Treasuries, bonds      
News Headlines
PEDA Still Hopeful for MBTA Project
North Adams Happenings April 16-22
Berkshire Health Systems Closing In On Deal To Acquire NBH
Edith Wharton Writing Competition Winners Announced
Volunteers needed for the Y's Tie Dye Dash
Lanesborough Loses Lawsuit Over Laston Park Construction
Williamstown Board Rejects Housing Panel Developer Choice
Save NARH Campaign Looks to Drum Up Wider Support
North Adams Closes Beaver Street Over Mudslide Fears
2014 Alma Riello Scholarship Deadline May 9
Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



Categories:
@theMarket (131)
Independent Investor (178)
Archives:
April 2014 (3)
April 2013 (3)
March 2014 (6)
February 2014 (6)
January 2014 (7)
December 2013 (8)
November 2013 (7)
October 2013 (6)
September 2013 (6)
August 2013 (8)
July 2013 (3)
June 2013 (5)
May 2013 (7)
Tags:
Europe Taxes Interest Rates Currency Metals Markets Banks Rally Stimulus Euro Recession Employment Debt Federal Reserve Markets Pullback Stocks Stock Market Congress Election Jobs Deficit Crisis Greece Japan Oil Retirement Bailout Commodities Economy Selloff Health Care Energy Fiscal Cliff Debt Ceiling
Popular Entries:
The Independent Investor: Understanding the Foreclosure Scandal
The Independent Investor: Don't Fight the Fed
The Independent Investor: Does Cash Mean Currencies?
@theMarket: QE II Supports the Markets
@theMarket: Markets Are Going Higher
The Independent Investor: General Motors — Back to the Future
The Independent Investor: How Will Wall Street II Play on Main Street?
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: Will the Municipal Bond Massacre Continue?
The Independent Investor: Why Are Interest Rates Rising?
Recent Entries:
The Independent Investor: Banks Face Tougher Regulations
@theMarket: A Crowded Trade
The Independent Investor: Obamacare Confounds Critics
@theMarket: The Faint of Heart
The Independent Investor: Do Women Have a Choice?
The Independent Investor: What's Wrong With This Flight Plan?
@theMarket: Hanging In There
The Independent Investor: Income Inequality Among Women
@theMarket: Markets Turn Positive for the Year
The Independent Investor: True Confessions


View All
Softball: Lee vs Hoosac
4-14-14 Kassandra Kazimierczak went 2-for-4 with a double...
Baseball: MG vs Hoosac
4-11-14 Dan Flynn's suicide squeeze with the bases loaded...
Softball: MG vs McCann
4-11-14 Mount Greylock and McCann Tech played an atypical...
Sullivan School CPR Class
Seventh-graders at Sullivan School in North Adams learned...
Lacrosse: Mounties vs. Hoosac
Mounties overwhelmed Hoosac Valley on Wednesday 14-1....
North Adams Furnace St. Fire
Firefighters contained a top floor apartment blaze on...
Berkshire Chamber Career Fair...
More than 50 employers connected with job seekers at...
Lacrosse: MG vs St. Joe
Mount Greylock boys lacrosse team won 17-4 St. Joseph at...
Softball: MG vs Drury
4-8-14 Mount Greylock softball claimed a 7-2 victory over...
Wahconah High School Musical...
Wahconah Regional High School is putting on the 1930...
Drury Coach Marceau Benefit
Friends and supporters filled the Eagles Hall on Friday...
Lenox High International Fair
Lenox Memorial Middle and High School students got to...
Slice of Life Pizza 2014
Moments House's annual Slice of Life fundraiser that pits...
North Adams Hospital Closes
Union members and supporters of North Adams Regional...
2014 Berkshire Awards
The Berkshire Awards ceremony was held on Friday night at...
Chamber Night At Moments...
The Berkshire Chamber of Commerce visited the new Moments...
Softball: Lee vs Hoosac
4-14-14 Kassandra Kazimierczak went 2-for-4 with a double...
Baseball: MG vs Hoosac
4-11-14 Dan Flynn's suicide squeeze with the bases loaded...
Softball: MG vs McCann
4-11-14 Mount Greylock and McCann Tech played an atypical...
Sullivan School CPR Class
Seventh-graders at Sullivan School in North Adams learned...
Lacrosse: Mounties vs. Hoosac
Mounties overwhelmed Hoosac Valley on Wednesday 14-1....
| Home | A & E | Business | Community News | Dining | Real Estate | Schools | Sports & Outdoors | Berkshires Weather | Weddings
Advertise | Recommend This Page | Help Contact Us | Privacy Policy| User Agreement
iBerkshires.com is owned and operated by: Boxcar Media 102 Main Street, North Adams, MA 01247 -- T. 413-663-3384 F.413-664-4251
© 2000 Boxcar Media LLC - All rights reserved