Flight to Safety Again Sends Interest Rates Falling

It seems that the only time interest rates fall is when we have an “event” of some sort–in this case the tariffs placed on China.

Rates fell into the high 2.80’s before rebounding back up to 2.91%–we watched preferred stocks and baby bonds and there was no reaction whatsoever–flat (overall). Something we have noticed this year is that when interest rates fall income investments stay steady, but if they rise many income investments fall a bit. Obviously investors believe rates are moving higher–at some point in time.  Of course if the Europeans don’t get their growth going money will keep pouring in to capture our higher interest rates.

The Fed’s tapering programs took a week off as the Fed Balance Sheet grew by about $2 billion last week.  So in the last 12 weeks the balance sheet has fallen by $80 billion–at this rate it will take about 10 years to get the balance sheet normalized–don’t think that is going to happen–no way.  As we have mentioned before the “run off” in the balance sheet (meaning bonds mature and the Fed DOES NOT reinvest the proceeds) continues to put upward pressure on interest rates.  So $80 billion of new money was needed to buy bonds–thus far it has worked out–but 1 small glitch in the process could send rates much higher–guess we will have to wait and see how this plays out.

4 thoughts on “Flight to Safety Again Sends Interest Rates Falling”

  1. This is why we have the real possibility of an inverted yield curve. Right now, 5 year at 2.801, 10 year at 2.924, and 30 year at 3.047. The short end driven by fed rate policy, the longer term being driven by long term outlook and absolutely impacted by Europe and other oversea’s economies. I am not sure at this rate difference why anybody buys a 30 year bond

    1. Hi SteveA–yes I think a few of us had a little exchange on this topic yesterday–why go long for no extra return and plenty of interest rate risk? I heard Draghi yesterday comment yesterday that EU GDP growth “was down to .4% (from .7%)–but that is still strong growth”–what is he smoking? Seems to me that Europe isn’t go to have real growth to speak in my lifetime meaning I have no idea how they ever unwind the European central banks QE purchases. Pretty scary long term.

      1. Tim,

        certainly agree with the comment on European growth, or lack of. Europe is facing many headwinds: from a dysfunctional banking system to the alarming drop in national fertility rates, these are issues that monetary policy alone can not fix. Money will continue to flow into US markets, both equity and debt, simply because they are deep, liquid and, for government debt, safe.

        1. I think the only hope for growth with EU countries is to establish their own versions of Silicon Valley and invest in tech companies with the potential to generate global reveneue. Sweden is doing the best at this IMO (Spotify, Skype, King)

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