Is The Low-Rate Era Over; Is The Fed Losing Control Of Interest Rates? (TBT, TLT, SHY, IEF, TBF)

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March 20, 2012 11:08am NYSE:IEF NYSE:SHY

Mike Larson:  Interest rates are the lifeblood of the capital markets and the real economy. Lower rates and easy money fuel asset bubbles and economic activity. Higher rates and tighter money pop bubbles and restrain growth. It’s as simple as that!


So this week’s bond market action bears extremely close watching! Interest rates have been in a deep slumber since the summer of 2011. But that all changed a few days ago, when long-term yields exploded out of a months-long range.

The move isn’t huge yet — around a half a percentage point from recent lows. But if this is the beginning of the end of the low interest rate era, it’s going to have a massive impact on all kinds of assets over time. That means you’ll need to start adjusting your investing strategies — now!

Is the Fed Losing Control of Interest Rates?

The U.S. has been borrowing and spending money like mad. We’ve racked up $1 trillion-plus in annual deficits for the past few years, and we’ve amassed a debt load of $15.5 trillion … and counting. Neither the Democrats nor Republicans have offered a credible plan to get us off this trajectory, just like their European counterparts before them.

The debt chicken has already come home to roost in Europe. Countries like Greece, Ireland, Portugal, Spain, and Italy have seen their cost of borrowing surge, their sovereign bonds plunge, and their economies tank. But for the longest time, the selling wave never washed up on OUR shores.

Why?

Massive monetary manipulation by the Federal Reserve and central banks overseas! The Fed has been selling short-term Treasuries and buying long-term Treasuries as part of Operation Twist, a scheme designed to suppress long-term rates. And its counterparts in other countries have been printing gobs of money. A huge chunk of those pounds, yen, and euros were “parked” in Treasuries simply because they had no other place to go.

But now, economic forces are messing up the best-laid plans of the bureaucrats and money printers. Signs of improvement in the domestic economy, rising inflation pressures, and the long-term debt and deficit problems are all combining to torpedo the bond market!

Earlier this week, 10-year note yields surged to a five-month high of 2.29 percent. Long bond futures plunged seven points in price from the recent highs, one of the sharpest drops in some time.

They key question: Is the Fed finally losing control of interest rates? My answer: It sure looks like it!

The Consequences of Higher Rates for You!

So what do higher rates mean to you? Well, we haven’t moved very far … yet. That means we’re only talking about an impact of a quarter of a percentage point to a half a percentage point on things like long-term mortgage rates.

An  upward turn in interest rates could cripple the struggling housing sector.
An upward turn in interest rates could cripple the struggling housing sector.

But we’re still dealing with an oversupplied housing market, and we still have lenders remaining tight with qualification standards. So every small move higher in interest rates hurts more than it normally would. Indeed, higher rates could easily put the kibosh on the absolutely ridiculous, out-of-control move higher we’ve seen in housing and related stocks the past few months.

So if you own ‘em, sell ‘em!

If you’ve been looking to refinance, you shouldn’t wait much longer. You should lock in your loan rate now. If you’re buying or selling a home, make sure you factor higher borrowing costs into your decision. You’ll have to pay less if you’re purchasing to keep the same monthly mortgage payment at a higher interest rate. And if you’re selling, your potential buyers will have less buying power!

Meanwhile, lower rates and easy money have helped drive commodity prices higher and the dollar lower. But if rates go up and money gets tighter, you’ll likely see the dollar find support, gold get hammered harder, and some of the boil come out of oil. At the same time, bond prices, bond ETFs, and bond mutual funds could take a steep header.

So I’d strongly consider taking some profits and adding some hedges in these asset classes now, before this rate move really gathers steam! If you want more details … and specific investment recommendations … give my Safe Money Report a try! You can do so for just 13 cents per day, a small price to pay if you ask me, given the potential for rising rates to wreak havoc on the global markets!

Related: ProShares UltraShort 20+ Year Treasury ETF (NYSE:TBT),  iShares Barclays 7-10 Year Treasury Bond Fund (NYSE:IEF), ProShares Short 20+ Year Treasury ETF (NYSE:TBF), iShares Barclays 20+ Year Treas Bond ETF (NYSE:TLT), Barclays 1-3 Year Treasury Bond ETF (NYSE:SHY).

Until next time,

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. 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.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss  Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of  investing, interest rates, financial safety and economic forecasting.  To view archives or subscribe, visit http://www.moneyandmarkets.com/.


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