Friday, December 27, 2013

Over 3%, now

Ten-year gilt yields rise

"Ten-year gilt yields hit their highest since July 2011 on Friday, playing catch-up with Treasuries as investors bet faster growth in the UK and the United States would lead to earlier interest rate rises than previously assumed".

Posted by alan @ 03:30 PM (7580 views)
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12 thoughts on “Over 3%, now

  • Sterling touched above 1.65 today.

    I am hoping petrol finally falls in price, though fully expect an assault on Sterling by BOE if it starts rising above 1.8 towards $2. The Bank is refusing to raise rates because it does not want Sterling to pop out towards $3 in the case of if base rates jumped up to 5% or so. Interesting times. How do they react to Draghi seeking negative rates on their doorstep?

    We are talking now about hot capital flows and interesting times.

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  • Whereas a strong £ is bad for international corporations, Britain would do well by increasing the purchasing power of its 65 million plus consumers, and we cannot trade on price competitiveness, only on quality and innovation. Who cares if a widget costs 5x more if it is 10x more effective at what it does, but the BOE do not take that approach so will try to destroy the market’s attempt to increase our standard of living and improve our economy. They are our enemy.

    Look at the best economies in the world, Switzerland, Norway, etc. places with strong currencies. Were are the worst? Zimbabwe, most African Countries, the ones devaluing, because its about quality rather than quantity and its now what you have but what you do with it, but this non-linear dynamic thinking is French to British banksters.

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  • Whereas a strong £ is bad for international corporations, Britain would do well by increasing the purchasing power of its 65 million plus consumers, and we cannot trade on price competitiveness, only on quality and innovation. Who cares if a widget costs 5x more if it is 10x more effective at what it does, but the BOE do not take that approach so will try to destroy the market’s attempt to increase our standard of living and improve our economy. They are our enemy.

    Look at the best economies in the world, Switzerland, Norway, etc. places with strong currencies. Were are the worst? Zimbabwe, most African Countries, the ones devaluing, because its about quality rather than quantity and its now what you have but what you do with it, but this non-linear dynamic thinking is French to British banksters.

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  • Libertas, they will not raise interest rates to a meaningful level as the politicians, bankers, voters are making a mint out of them being low. Interest rates will only be raised when it is forced – after a major crisis.

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  • mark wadsworth says:

    Alan, that is the best news I’ve had all Xmas, thanks. Both UK and US 10-year rates finally both hit 3%. Excellent.

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  • Khards, I think you are saying that rates will not be raised until keeping them low loses the bankers money and all of a sudden sentiment will have changed and it will be all about attracting savings and lending them out at profit. When that time comes is anybody’s guess, but the government will have a say regarding the value of Sterling, and that is where things get interesting, for it is becoming clear that Sterling looks ready to pop out and there are clearly hot money flows from Europe to London, led by Draghi’s recent cut plus call for negative interest rates there. However, they may even be forced to raise rates in Europe sometime soon to defend the Euro if capital outflows become too severe, since if QE is not possible to the extent they require, higher rates will be required to re-capitalise financial institutions and governments.

    Ironically, with the world being more global now, the changes appear to come about at glacial speeds, with one left guessing as to when sentiment will shift.

    Interestingly, whilst bankers and politicians seem intent on managing the global economy into synchronicity, the underlying trend on my radar is divergence. I feel that the big political project right now is, like King Canute parting the sea, attempting to end real divergences, throwing the kitchen sink at keeping everything homogenous for the benefit of the business planning of international corporations.

    We see it in Britain, where we are destroying our economy to keep Sterling a similar value to the Euro, when it should drift higher, and certainly the Swiss Franc is on a similar, unsustainable peg that has seen the Swiss government piss untold amounts of valuable Swiss Franc into the wind as it sells its own high quality currency for as many Euros as Draghi will throw them.

    My big issue is when The Eurozone push into negative territory, can the stronger economies burn the last vestiges of capital and savings into the furnace at Mount Doom to simply maintain this farce, or will they be swept away with the tide and be forced to let their currencies find a new value and equilibrium?

    Freedom is exciting and allowing currencies to fluctuate allows economies to re-balance and for misallocations of wealth to be properly distributed by market forces, and I can’t wait for the end of this Soviet experiment at boredom and homogeneity towards free markets finally breaking out, and I see the recent rise in Sterling as a bellwether to some exciting volatility ahead that could lead our economies into new directions, new specialisms, ones not anticipated by any central planner but that will chart the future for us, and not a moment too soon.

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  • Reuters said this morning:
    “The yield on the U.S. 10-year Treasury note rose to a high of 3.02 percent, reflecting signs of improvement in the U.S. economy and expectations that the Federal Reserve will steadily withdraw stimulus that kept a lid on interest rates for several years”.

    Further tapering (or reducing QE) will result in interest rates rising, one must deduce. There are countless blogs “out there” which suggest that any further attempts at reducing the current level of QE will push interest rates higher, to 3.5% and then above 4%.

    If you owe lots of money (as the USA and UK does) the interest costs on those loans will rise commensurately. I have a feeling the governments won’t want that to happen, and will act accordingly.

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  • Firstly banks make money on the way down and the way up. I didn’t notice many exec’s lose their bonus last time they got bailed out. MP’s will still get paid regardless of interest rate rises.

    Interest rates are caught between a rock and a hard place. Wage deflation due to globalization on one side, thus reduced interest rates to mask the effect. The 0% interest rate policy is it encourages more and more debt (as we are seeing) against these deflating wages. Printing money is being used as the primary tool to hold down interest rates and this is creating bubbles in EVERYTHING. Keep printing and you create a larger bubble.
    Again nobody wants to be seen ending the party, just like they didn’t in 2004/5/6/7/8 so we are back in the same game of not doing anything until the markets implode by themselves.

    I expect tapering of the current scheme, but another scheme will need to be brought in to monetize governments debt, whether they do this publicly or just print behind smoke and mirrors is another question.

    One things for sure US, USA and Europe cannot stop printing and they will not voluntarily raise rates. I wouldn’t put it past the establishment to manufacture another 9/11 style ‘crisis’ as an excuse to print more faster and move rates negative.

    Things could get interesting this in 2014 when China decides to blow the feck out of Japan, of course there will again be a dash for safe haven and the cost of government borrowing reduced.

    I somehow expect our independent central banks to decouple mortgage rates from government bonds, thus enabling more control over each. It would be possible under this scenario to jack up mortgage rates whist keeping the BOE printing for the government.

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  • stillthinking says:

    Any upward change in interest rates is damaging as Callaghan said, people get marooned on agreed wages that in suddenly adjusted real terms are no longer viably supported by their export price. All UK investments suddenly have running costs 5% more than planned etc One of the many reasons why central planners fiddling with the pricing level is bad.

    I don’t believe that there will be any adjustment. The government will make a decision where to let the increased costs fall. More obligatory pension saving. Later access or denied access to pension pot, reduction of the cash draw down. So on and so on. The government can reduce spending a myriad of ways. Reduction of service provision.

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  • stillthinking says:

    I would also like to add that the zero bound was not, IMO, about lowering the cost of borrowing, it was about killing the market. Nobody is going to pay the top price of zero interest when all they have to do is wait for interest rates to rise.
    So when interest rate rises sales will increase, and when sales increase borrowing increases. So in the perverse way that although lowering borrowing costs a tad encourages borrowing, but pushing them to zero because of the effect of supporting valuations hammers borrowers but pushes sellers to press on and grab onto yield. I think that increasing interest rates will clear the market and because of that in the opposite perverse way raising interest rates which push down on valuations will increase demand for credit and resulting inflation.

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  • If interest rates were increased to a historically low 2.5%, then the yield on BTL portfolios may start to look quite low considering maintenance and void periods.

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  • Interest rate rises are damaging to the leveraged elements of society, such as property and government and financial services. However, I saw stats that manufacturing makes up 1% of loans in this country. If manufacturers develop a thirst for credit and continue expanding here, rates could soar as they seek to obtain more capital and they could sustain high rates for a very long period, maybe 30yrs worth of growth there.

    Viewing manufacturers as a source of income, maybe even government would let this happen.

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