OT: Interest rates
Charles,
(Or anyone who wants to tackle my questions...)
Help me out on this, cause I am a little confused with current rates and the effect of the inverted yield curve on the stock market...And it has been a while since undergrad finance/econ.
I think everyone believes that the Fed is not done raising rates and interest rates may go higher.
So, who would buy LT bonds, knowing this?
If someone buys a 30yr zero today yielding 6.3%, the price is about what, 162? (my calculator, since I never look up bond quotes). If the yield goes to 7% in one year, the price is around 132. Not a good return for a year.
Therefore, I assume that for the long end to go up, there will be more long bond sellers, than buyers until rates top out.
Where does the bond money go in times of increasing inflation?
Cash? Not the best idea to hold a depreciating asset...
ST bonds? That would definitely bring down ST rates, but the Fed kind of sets the floor for those. And ST bonds are just not that exciting. So institutions, like insurance companies would go ST.
Stocks?
Isn't the prevailing idea that higher interest rates kill the stock market because cost of debt for corps is now greater, thus hurting earnings?
IMHO the stock market is effected more by supply and demand forces seeking a greater return on capital. Toss in the fact that most tech and inet companies are more equity financed, vs debt financed, and I don't see slightly increasing rates as bad for the market, at least for my stocks ;)
In fact, healthy techs that have some debt could repurchase some of their corp bonds at a discount, should rates go up.
Overall, I think that money will come out of long bonds and into stocks and short bonds. That will correct the yield curve, and make me money. Sound about right?
Of course, this does not explain why bonds rallied again today. Seeing that the 10 yr. is yielding 18 bp more than the 30, there must be some strong belief that LT rates are headed lower.
What gives?
If by some freak chance I am correct, then Greenie trying to raise rates to "cool" the stock market will not work so well. Which, BTW, isn't his damn job anyway. I wish he would just focus on growth, inflation, unemployment, productivity, etc.
-JG@confused.com |
