Not a creature was stirring, not even a mouse, here in the U.S. markets late last week. But on Christmas Day, China’s central bank shocked investors …

Specifically, the People’s Bank of China raised short-term interest rates for the second time in the past three months.

The 25 basis point hike to 5.81 percent in the benchmark one-year lending rate effectively puts the world on notice that China is more concerned about pricing pressure than it has been in a long, long time. And for good reason: Chinese inflation surged to a 28-month high of 5.1 percent in November.

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China is hardly alone in this shift toward higher rates. Other central banks around the world are trying like crazy to combat inflation and the negative side effects of easy money.

Just consider how …

Rates Are Rising Worldwide!

Malaysia started raising rates in March. Its overnight policy rate now stands at 2.75 percent after three hikes. Elsewhere in Southeast Asia, Taiwan started raising its discount rate in June, while South Korea has boosted its benchmark rate twice since July.

The global money war is intensifying.

New Zealand has only hiked rates twice since June. But Australia has jacked rates up seven times to 4.75 percent, while the Reserve Bank of India has raised rates six times since March to 6.25 percent.

In Europe, concern over the heavily indebted “PIIGS” countries has kept the European Central Bank on hold. But Sweden’s Riskbank has raised rates four times to 1.25 percent since July, while Norway has hiked its rates three times in the past 14 months.

And what about South America?

Brazil has boosted its benchmark short-term rate by 200 basis points to 10.75 percent, with another 100 to 200 points worth of hikes likely in 2011. Chile has more than tripled rates to 3.25 percent from 1 percent in only six months, while Peru has increased rates five times since May.

In other words, the global money war I’ve been talking about for some time is intensifying! Smaller nations around the world are raising rates, and now, the 800-pound gorilla — China — is following suit.

Meanwhile, the …

Fed Is Still Sitting on Its Hands as Money War Heats Up

The only glaring exceptions? The so-called “developed” economies — Japan, the U.S., and “core” Europe. Unlike their “emerging” market neighbors, they’re weighed down with too much debt, too little growth, and too much short-sightedness by policymakers.

The Fed refuses to budge.

Indeed, despite rising inflation pressure … better economic news … and a backfiring QE2 program, the U.S. Federal Reserve has signaled plans to leave rates pegged near 0 percent until the sun exhausts its fuel in, oh, about 5 billion years.

The relative imbalance between U.S. rates and rates in many foreign countries is keeping the pressure on the dollar. It’s also juicing commodity and gold prices.

Most importantly, the Fed’s intransience is forcing longer-term bond investors to take matters into their OWN hands. They’re dumping Treasury bonds hand-over-fist, leading to the worst rout for long bonds in 18 months.

My recommended course of action?

First, hedge against bond price declines by using ETFs that rise in value as Treasuries fall.

Second, keep your fixed-income money in shorter-term ETFs or mutual funds rather than longer-term ones to avoid big potential losses. That means something like the iShares Barclays 1-3 Year Treasury Bond Fund (NYSE:SHY) rather than the Vanguard Extended Duration Treasury ETF (NYSE:EDV).

Third, keep your eye on the speed and magnitude of the increase. Should the rate rout accelerate and worsen, it could be a real headwind for stock prices.

And fourth? Have a fantastic New Year! I’m looking forward to helping you make 2011 your most profitable yet.

Written By Mike Larson From Money And Markets

Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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