Monday, February 1, 2010

Will Rising Rates Cause Next Bank Meltdown?

While nothing is ever certain in the markets, it sure does appear that the 10-year treasury rate is going to move higher. It's just a matter of days or weeks, according the my interpretation of the chart. Of course, we could have one last "hurrah" here and then Greece collapses or some other cataclismic event that would cause the world to flock to US Treasuries again. Sometimes I wonder if these events arent coordinated, especially at times when rising rates appear certain.

I was pleased to read that finally, I am not alone in the bond bear camp. A story in Bloomberg this morning notes how Wells Fargo has been unloading the carry trade.
Wells Fargo Betting on Higher Rates The carry trade is the easy, taking money from the government for free and then giving it back to them for treasury securities that pay a higher rate. Believe me, if we had this option in life, none of us would ever have to work again. Banks get to do this with the excuse that there is no loan demand.

But of course, there could be risk, I think, in doing this. Or is there? Seems to me that last year, FASB eliminated the mark-to-market provisions in bank accounting, therefore, even if treasuries owned by banks declined in value, they wouldn't have to note the decline on the balance sheet as the bonds will eventually go back to par. I believe that is how it works and probably why the government pressed the accounting standards board to make these changes.

Anyway, I suppose that the big banks could languish, waiting for the treasuries to mature while those who had been nimble and swift, such as Wells Fargo, take advantage of rising rates and the normally rising demand for money that causes this. This is apparently the Wells philosophy.

Everyone else seems to be playing a game of chicken, including the Federal Reserve. The interest rate game that has been going on in an attempt to save banks that lost big gambles is threatening us all. A bad future move by Bernanke can either lead us into Carter-era inflation or depression. And of course, everyone will defend Bernanke saying that he did the best he could, under unusual circumstances.

I for one will avoid the politics and try my best to profit from whatever situation the world hands me. I believe that playing the interest rates to rise this year will probably be one of the better trades to make.

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