Monday, October 26, 2009

Many Expecting Interest Rate Rise

Interest rates are on the rise! Ten-year treasury rates are once again breaking through the 3.5% level while the longer termed, 30 year rate is breaking to new recent highs at 4.33%. With additional supply hitting the market this week, many are concerned that interest rates must rise soon either through market forces or by the Federal Reserve signalling that it will soon begin raising rates.

Many experts say that the 0% rate set by the Federal Reserve was a good policy when the markets were crashing and the Fed needed to implement emergency measures. It is now clear, with stock markets up significantly from their lows, that we are not in a panic mode any longer and rates need to rise. Most believe that the Federal Reserve was responsible in a large part for the past bubbles including the High Tech bubble and Housing bubble. Both which led to stock market crashes. By keeping rates so low again, new asset classes are reaching bubble levels. Low interest rates have led to a weakening dollar and very high commodity prices. Despite a weakened economy, the price of oil is again above $80 and many believe that soon it will be well above $100. It's not that there is demand for it, since oil is priced in dollars, as the dollar weakens, prices of oil, gold and other commodities rise to compensate for the lower dollar. The Federal Reserve could cause the dollar to strengthen by raising interest rates.

As mentioned before, the Ultra Short 20 Year+ Exchange Traded Fund (symbol:TBT) rises when interest rates rise. Since many hold both stocks and bonds in their portfolios, and both stocks and bonds have been rising, they need to consider ways to protect themselves when the markets fall. Without prudent money management and risk control, investors could find themselves watching their life savings dwindle.

Last week's action in TBT might have been a three week test of the low and a reversal, breaking through the trend line. If we are in fact establishing a base here, one could expect TBT to test the 60 level again. A break out of this level can lead to significantly higher prices.

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