Interest rates are rising even before the Federal Reserve moves
The march to higher U.S. interest rates is on.
Oh, the Federal Reserve won’t increase short-term rates, the only ones it directly controls, for an “extended period” yet. I still think we’re looking at mid- to late-2010 before the Fed moves. Ben Bernanke and Company want to be dead certain that the economy is locked into sustainable growth before they risk raising interest rates.
But long-term rates aren’t waiting on the Fed. They have begun what looks like an extended move higher.
At the end of 2008 the difference in yield between the two-year Treasury note and the 30-year Treasury bond was 1.91 percentage points. After yesterday’s auction of $13 billion in 30-year bonds the difference in yield, what’s called the yield curve, between 2-year and 30-year Treasuries was 3.73 percentage points. (At 11 a.m. this morning is was 3.71 percentage points.)
That’s the biggest gap between two-year and 30-year yields in 29 years, according to Bloomberg. Over the last five years, spread between 2-year and 30-year Treasuries has averaged just 1.32 percentage points.
The gap between 3-month Treasury bills, yielding 0.02%, and 30-year bonds, yielding 4.54, was even bigger at 4.52 percentage points.
What’s going on? Two trends are driving long-term yields higher while short-term yields are anchored in place by Federal Reserve policy. Read more
The world’s greatest currency? Canada’s Loonie gets my vote. And soon some of my money.
Not the yen, or the euro or the reminbi. Sure as shootin’ not the U.S. Dollar or the pound.
Yep, it’s the Loonie, Canada’s dollar with the ghostly-voiced diving bird on it, that gets my vote as the world’s greatest currency. And not just at the moment either. This is the currency I most want to own for the next decade.
Right now, all the currencies of the global commodity producers are in rally mode. The Australian and New Zealand dollars, the Norwegian krone, and the Canadian Loonie have all hit 11-month highs against the U.S. dollar this week.
You don’t exactly have to be Mycroft Holmes to figure out why. With a belief that China has gone on a sustainable commodity buying spree to support its economic recovery, commodity prices have soared and so have the stock markets and currencies of countries with commodity-based economies.
The iShares MSCI Canada Index (EWC) is up 80 from its March 9 low through the close on August 5–the U.S. Standard & Poor’s 500 Stock Index is up 48% in that period–and the Canadian dollar is up 21% against the U.S. dollar during the same time.
I’d put the Canadian Loonie and Canadian stocks ahead of the currencies and stocks of other commodity-based countries because Canada’s commodity basket is the most diversified in the world. (Well, Brazil will give Canada a run for the money on that standard if the South Atlantic oil discoveries pan out.) Canada has Norway’s oil, and Australia’s mines and farms, and New Zealand’s timber and farms all in one package.
And Canada’s Loonie is better positioned in the interest rate cycle. High domestic interest rates–as long as they’re not so high that they signal some major economic dysfunction–add strength to a currency. Part of the strength of the Australian and New Zealand dollars, for example, results from the high 3% and 2.5% interest rates, respectively, set by the central banks of those countries. Money flows into Australia and New Zealand as investors look for those higher yields and that pushes up demand for those currencies (since to get the yield you have to buy something denominated in the local currency.) Read more
