Tuesday, April 6, 2010

The Threat Of Rising Interest Rates

As seen on the following 10-year daily chart, the 10-Year Treasury Yield has been rising as of late:

chart courtesy of StockCharts.com

There is very little general expectation for a significant rise in interest rates. In fact, the average economist forecast (as seen for the March 2010 Wall Street Journal Economist Survey) for the 10-Year Treasury Yield for December 31, 2010 is 4.24%.

I believe that there is high potential for interest rates to rise faster than expected, and the economic implications of such, should it happen, can hardly be understated.

Falling interest rates over the last 20 years have been an "enabler" of much of our current day economy. These falling interest rates are seen in the 20-year monthly chart shown below:

chart courtesy of StockCharts.com

Of course, a significant rise in interest rates would have adverse effects on many different economic areas, and would likely serve to impair and/or derail any hopes of an economic recovery. Some areas that would be impacted by rising interest rates would include: real estate, all facets of lending, the bond market, corporate profitability, etc. The list is virtually endless.

Furthermore, consumer spending would likely be impaired, as would the government's ability to rather cheaply (and easily) fund the outsized deficits and debts. As well, the government's ability to "stimulate" the economy through deficit spending could largely be impeded.

I've previous mentioned (in a December 2nd post) that I believe that U.S. Treasuries are in a "bubble." While some have expressed the same view, it doesn't appear as if there is recognition of the perilousness of such a condition.

SPX at 1187.44 as this post is written

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