Jubilee Prosperity

There are $454 Trillion derivatives which represent eight times the Global GDP. Of these, by far the majority are interest rate swaps. This suggests an acute financial sensitivity to interest rates.

While Central Banks such as the Federal Reserve can work short-term rates like Federal Funds down for a short while by monetarizing everything that moves until it doesn’t, the longer-term interest rate markets comprised of bills, notes and bonds from a year to 30-year maturities, are more determined by what is left of free markets, looking to get the safest highest return on their capital savings. It’s hard to believe some AAA corporations actually issued 40-year bonds not too long ago.

The Fed this past Spring attempted to control longer-term rates by announcing the purchase of $1.55 Trillion of bonds and mortgages.

After purchasing $156.5 Billion of bonds and $555.9 Billion of mortgages, we saw a brief decline in interest rates followed by climbing long-term rates again:

http://stockcharts.com/charts/gallery.html?tyx

A chart reader with considerable experience in the markets might be forgiven for noting the long Thirty Year Treasury Bond hit 2.519% last December 2008 when Depression was expected after the Fall 2008 Panic. Then $TYX hit 5.066% in June 2009 when it was clear the Fed had little or no control of longer-term interest rates, and all the money created by the Fed might be inflationary.

Now, in the fall of 2009, as people realize Fed funny money is going nowhere fast but to keep big bad banks operating with broken balance sheets, long-term interest rates are declining again, on target for 3.10%.

In fact, we are still long the EDV with trailing sell stops, having picked it up in the area of 87 this Spring.

This is not a recommendation, which we do not even make to private subscribers to our $1000 Seasonal Outlook, preferring to provide useful information.

http://stockcharts.com/charts/gallery.html?edv

Only a few realize real interest rates are the highest in history and favor lenders over borrowers for the first time since 1981.

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This entry was posted on Friday, October 23rd, 2009 at 6:02 pm and is filed under Financial Planning. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.