Monday, May 19, 2014

Bonds Rally, But Why?

With the ECB poised to announce big changes on June 5, the bond markets are prepared for more intervention, or should I say lower interest rates. It has become crystal clear that the intention of the central banks is to keep interest rates low by any and every means possible. There is no rational or economic sense to keeping rates low, but there is enormous pressure form debt-laden countries. Lower interest rates translate to lower interest payments.  When you stare at the yields of Germany and France and see their 10-year bonds trading at 1.34% and 1.80% respectively, it makes the US 10-year look extremely attractive, even at 2.51%.  As long as the ECB’s policy remains accommodative, a stance which has now appeared to receive the blessings of the German Bundesbank, interest rates will continue to fall and US rates, regardless of the US economy, will be a very attractive venue for global bond buyers. In the end, low rates will be good for the country, good for real estate, good for corporate borrowing, and good for anyone that wishes to borrow. It will also be bad for savers, but that is of little concern, because “country before all else,” right?

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