Say you or I borrowed $10,000 on a credit card and three months later discussed with the issuing bank the fact that we had hit hard times and might not be able to pay the money back.
The bank would undoubtedly reduce our credit limit and raise our interest rate.
When it comes to the US debt, however, we have seen the exact opposite. The government has raised its own credit limit, S&P has downgraded US debt yet interest rates on long term US debt have gone down!!
What on earth is going on here?
There are two primary reasons why interest rates are going down right now, let's take a look.
1) Banks with access to the Fed discount window can borrow money almost for free, then lend it back to the government longer term and profit the spread. In other words, the bank does not want or need the consumer, you! Of course, this is a terrible investment long term because the bank is lending US dollars, will get paid back in US dollars which are likely to decline over time because of the massive spending spree that the US is on. In fact, if you were able to get a loan now and buy a home, you would also likely be paying the bank back in cheaper US dollars. Hmmm... no wonder the bank doesn't want to lend you money. Of course the bank president does not have to worry about five years from now because he will show a profit on his yield spread this year, make his fat bonus this year and get his golden parachute when he gets fired later.
So banks are actually purchasing long term US debt thereby driving the interest rate lower.
http://seekingalpha.com/article/180909-why-should-banks-loan-when-they-can-play-the-yield-curve
2) There is always a certain inverse relationship between the stock market and the bond market and this is especially true during financial panics when money dives into Treasuries, or safe havens. It's not that the bond market is so great but that there is a lack of suitable alternatives.
"In the land of the blind, the one eyed man is king." -Erasmus
http://www.forexpros.com/rates-bonds/us-10-yr-t-note-advanced-chart
Comments(0)