Tip, I think it has started a bit. The rise in long rates has hurt a lot of players, especially the hedge funds who are over leveraged. However, the truly huge players, corporations and banks, are, generally, not over leveraged. They are simply one on one: borrowing a billion at short rates and investing a billion at 2 year rates. You need a big move up in short rates to shake them out. If they can borrow at 1% and lend at 2%, that 1% spread goes right to the bottom line. If rates go up a little, they make less, but don't start losing until the short rate goes to 2%. And, since the maturity of the long asset is declining every day, they have a pretty short time window.
So, if they can count on Greenspan's "measured rate hikes," they will still make money. But, if he gets aggressive, pardon me while I laugh, they could get crushed. Of course, somebody will be hurt when rates do rise and especially if the yield curve inverts. That would be death on a stick. |
