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Why Are Interest Rates Headed Higher?

Posted by Larry Doyle on March 1, 2009 3:57 PM |

While our domestic stock markets are down approximately 50% over the last 14 months, there has been a rush of cash into short term money market funds, government bond funds, and in the last few months corporate bond funds and municipal bond funds. As I mentioned in my February 2009 Market Review, I am increasingly nervous about bond investments at this juncture. Why? I’m glad you asked.

1. Primarily due to the massive global government funding needs which are just starting to hit the market. In a recent piece, the highly regarded Financial Times projects global government debt issuance to TRIPLE in 2009.

German Prime Minister Angela Merkel is concerned about European countries looking to tap the markets on or near the same dates. She is proposing global coordination of debt issuance so as to insure that rates are not DRIVEN higher.

2. Sovereign credit risks are increasing dramatically. Not long ago, Irish government debt traded in line with German Bunds (government debt). Irish 10yr debt now trades at a premium of 2.5% to that German debt. This phenomena is destabilizing for the European Community at large and for those countries (Ireland, Portugal and Greece) in greatest distress. If we do experience a sovereign default then there is a chance that we will have a flight to quality with capital flowing to the United States.

3. Here in the United States our government and private debt will soon exceed 100% of GDP. Analysts estimate that the U.S. will issue $2.6 trillion in net additional debt in calendar 2009!! Our 2yr Treasury note is up 25 basis points (.25%) year to date while our 10yr Treasury note is up 80 basis points (.80%). Remember rates up, bond values down. These moves are significant especially in light of a stock market that is down almost 20% year to date!!

4. Who else needs money? Banks, insurance companies, pension funds, municipalities, consumers, automotive companies, private corporations, et al!!

Municipalities specifically will need to raise taxes and issue debt to replenish their coffers and especially their pension obligations. Both of those moves will pressure consumers and housing and further exacerbate our current economic distress.

5. Bonds have dramatically outperformed stocks in the first two months of 2009 but I now feel a wave of bond issuance coming and with the crowding out effect becoming ever more problematic, I believe these interest rates have the potential to ratchet higher.

None other than Warren Buffet himself cautioned against a bubble in the U.S. Treasury market.

Again, I caution people to review their overall asset/liability situation, work to cut expenses, and consult with their own financial planner. Given what I see on the horizon, though, cash will continue to be the best place to hang out while this hurricane blows through our global economy.


  • rolling_thunder

    Germany is in trouble and there are public demonstrations.
    Here’s a portal for Europe. See Germany.,1518,609411,00.html

    Ron Paul recently speaks about the banks and addresses Bernake.

    Denmark is imploding but Obama will solicit them to be involved in the Chicago Olympics. Oomph! Is this a distraction or just self-centeredness?
    Read below………..

    According to, President Obama will be coming to Denmark in October to lobby for the 2016 Olympics to be held in his home town of Chicago.

    The report cites Chicago’s Mayor Richard Daley, who according to local media and CBS, has said that Obama will definitely be going to Copenhagen in connection with an IOC meeting which is to choose which city will host the 2016 Olympic Games.
    “We expect Obama to come to the opening session at the Opera on October 1, and then hold a speech on October 2″

  • rolling_thunder

    Oh and one more thing:
    The HBPA that you mentioned at NQ is supposedly a LaRouche supported bill. I like the bill. I hope more states get on board.

    And more publications by him. He talks about forcing Pelosi to resign.
    “In his Tuesday evening speech to Congress, President Obama called on Congress to do “whatever is necessary” to fix the financial system, but didn’t say what it was, indicating that he had no agreement on it. “This is the Pelosi thing,” LaRouche said. “It’s still a Pelosi jam-up. It appears that as long as she remains in the Congress, the United States is not going to take any steps towards survival.”

  • Larry Doyle

    Rolling…Thanks for those links. I especially liked the one about Germany. The European Union as a whole and Germany specifically has had identity problems for a while. Those issues are being magnified at this time. Does the union survive especially if a few countries default? Good question. I bet yes, but perhaps in a weakened position.

    I do not disagree that Pelosi is a major problem. We will have to deal with her for the next two years but hopefully not after that.

    I do believe we need a solid third party but that will likely not happen given the amount of money generated by the Dems and Reps.

    I do like Ron Paul. He makes a lot of sense, no pun intended.

    Thanks for stopping by!!

  • lizzy

    This post brings back memories. I arrived in New York City in 1974; about the time Gerald Ford told NYC to “Drop Dead.” That was default brinkmanship but we got through it.The City seemed to stabilize its finances. Now both New York City and New York State depend on income from Wall Street so we have been hit hard lately. Lots of people needing lots of money internationally. So much economic instability would create problems for the EU.

  • Larry Doyle

    Those who forget history are doomed to repeat it. Not that the specific root causes of this crisis have occurred previously but the general principles are the same.

    What a mess. I do hope this site helps make some sense of it all.

    Thanks for your support.
    Please let others know about Sense on Cents!!

  • Mountainaires

    Whew, the news I’ve read this morning all echoes your analysis, LD. This implosion looks to be accelerating at a shocking rate at this point. Who knows what the future will bring–aside from higher interest rates and state and local taxes as well, even for the middle and lower incomes. This looks to me like a long-term crisis. I admit I’m the biggest doom-n-gloomer around, but still, the news seems at every point, to reinforce my negative perspective, so who am I to quibble? I’m in survival mode, and have been for some 3 years, because I was determined not to be caught again, after losing a bundle in the tech bubble implosion. I learned a lesson. I’ve paid close attention since then, and have positioned myself about as safely as possible, short of a metal mattress buried in the yard. And, even that’s not safe, when inflation makes it worthless. Sheesh. I know you don’t like Gold; but in an economic apocalypse, isn’t that at least something you can hold in your hand, and enjoy for it’s shiny value? I mean, when all else is gone….what else do you have? 🙂

    Great site. You make “sense on cents.” I’ll be reading regularly!

  • Larry Doyle


    The markets and economic news do become somewhat overwhelming. I think that by highlighting the issues as much as possible as far in advance it serves to help everybody. Your links and analysis have been extremely helpful to me and all the readers. Please feel free to share the site. I thank you for your support.

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