Sunday, August 03, 2003

The friendly financial reporters at the Financial Times are certain that rising interest rates in the US are the result of "mounting confidence that the US economy is finally poised for a period of strong growth."

Whether this is the cause or not, rates are certainly shooting skywards. The 10-year Treasury note stood at 3.13% on June 13. At the end of July it is at 4.49%. That's 136 basis points in 7 weeks, a remarkably rapid turnaround in "confidence" if there ever was one!

But is this all really about renewed "confidence"? Have the financial markets suddenly taken Paxil en masse?

Maybe the boys at FT should try some more concrete analysis on for size:
The announcement from the Treasury that they would need to raise $450 billion over the course of the next year started to reverse the process.

With that announcement, the bond market realized they were going to get stuffed with a lot more bonds for the sake of reviving the economy, and more parochially, for the sake of re-electing the president.

That started to push interest rates up, and all that derivatives-related activity suddenly went into reverse.

The Federal Reserve also played a role. Alan Greenspan testified in Congress last month that some research showed that alternative methods of conducting monetary policy, like buying 10-year Treasuries to bring rates down, wasn't a good idea. That didn't help.
Too much debt chasing too few borrowers. Didn't Republicans used to care about stuff like this??
if rates went up another half a point in the next six weeks, that would be a cause for worry, and might be too much of a shock for the economy and the stock market.
I guess it's time to mount an interest rate watch. The 10-year above 5.0% means bad news for the Iraq-driven "recovery". Stay tuned.

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