Saturday, March 27, 2010

The Debts of the World: Low (US) Interest Rates Continue to Dominate Discussion

It's been a while since I last posted because I have been busy with other things in my life. Like focusing on passing 2 state bar exams and working full time. Anyway, I have certainly not been idle on the investment front.

The ongoing credit driven events in Greece and China have driven government yield premiums to higher highs as can be seen here in this dynamic yield curve chart that is overlaid with the benchmark US S&P stock market index:

Is this signs of a normalization?

Late last August, the markets were driven by the inverse dollar - risk premium trade where a lower dollar was directly correlated with higher asset prices in risk related trades such as commodities (and commodity linked currencies like the Aussie Dollar) and equities (particularly emerging market equities). Now, that correlation seems to have weakened with the dollar rising in tandem with benchmark interest rates.

Indeed, markets are continuing to price in a market driven by low US interest rates through the end of 2010 as evidenced by the Eurodollar futures contract (there are 3 more contract dates left in 2010 - June, September, and December. All 3 show that traders expect a continuation of low rates. For brevity purposes, the nearest contract date, June, is listed here).
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