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-- Posted Friday, 10 December 2010 | Digg This Article | | Source: GoldSeek.com
US mortgage rates have risen by 0.85 per cent since the Federal Reserve first signaled its intension to go for a second round of quantitative easing three months ago. And this week the yield on 10-year US treasuries is up 0.35 per cent to 3.3 per cent in a widespread global sell-off of T-bonds. This is not supposed to be how QE2 works. The whole point of this $600 billion exercise is to squeeze interest rates down, and keep them down to give the US economy breathing space to recover. More and more debt The tax deal this week brought some relief to the stock market which was threatened with a sell-off if taxes went up. But it added $1 trillion of stimulus over two years, reckon BNP Paribas. Analysts said America’s budget deficit will now stay around 10 per cent for the next two years. Public debt of 110 per cent is close to debt spiral levels – when a country’s debt starts to expand because the interest is not being fully paid. The US can only hope to get away with this because the dollar is the reserve currency of the world. But the Fed now has to raise around $100 billion in treasury bond sales a month to keep this show on the road. Buy of last resort Will the world be happy to buy US bonds for much longer if the value of bonds continues to fall? Nobody wants to buy an asset whose price is falling. And lest we forget how it works, as interest rates go up bond prices go down. That leaves the Fed itself as the buyer of last resort. But as we now see QE2 does not actually seem to be working as expected. All market forces have inflection points and the Fed may have made a fatal misjudgment. If so then much higher interest rates will follow very much more quickly than anticipated by 99 per cent of investors. The panic for the exit door will be something to watch and avoid if at all possible. This looks like the end of the road for the bull run in bonds and stocks and another leg down for real estate. Dollar bulls The place to be, at least for a period, would be dollar cash or dollar-linked currencies to profit from high interest rates unlike the losing bond holders, and gold and silver would rocket in a flight from bonds as a safe haven, along with other commodities. But this set-up would be unstable too and liable to sharp corrections. The ArabianMoney newsletter will be taking an in-depth look at how investors should position themselves in this rapidly changing investment environment. You are taking the first step in reading this free analysis but for the full story you need our monthly newsletter (click here to sign up).
-- Posted Friday, 10 December 2010 | Digg This Article | Source: GoldSeek.com
Previous Articles by Peter Cooper
About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in
1999 to complete his first book, a history of the Bovis construction group.
Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.
 Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.
He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.
Order my book online from this link
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QE2 Pushing Interest Rates Up and Not Down
