The Coming Interest Rate Tsunami

Deficit-ridden governments around the world, led by the United States, require massive amounts of funding and they raise money by selling bonds. In particular there is a movement afoot to reduce reliance on selling short term investments like Treasury Bills and increase long term funding like 30 year bonds. It is like locking in your mortgage payments  at low interest rates for 30 years as opposed to having a floating rate mortgage.

This is a smart move at this juncture in the economic cycle, for governments, corporations and individuals alike. There is a very strong possibility we are at generational lows in interest rates and the competition for long term funding will ensure that the direction of interest rates will be up, perhaps dramatically so.

The interest  rate stage is set and investors who hold bond mutual funds, annuities and longer dated bond maturities could feel the wrath of the coming interest rate tsunami in a very significant way. Buyer beware!

For more read this embedded story by the New York Times on how the massive funding needs by the United States is going to change the interest rate landscape, good for long term borrowers not good for investors. Read the story here.

This entry was posted on 23. November 2009 at 15:49 and is filed under Inflation, Fixed Income. 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.