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Interest Rates on the Rise MoneyNews
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The yield on the 10-year U.S. Treasury note rose to the highest level since the Federal Reserve began hiking interest rates in June 2004, and most traders believe that rates will rise even higher in the months ahead. The yield on the 10-year note rose six basis points, to 4.74% yesterday. However, Yasutoshi Nagai, an economist at Daiwa Securities SMBC Co. in Tokyo, thinks that investors shouldn't jump into Treasuries too quickly.
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"This is still not a good time to be buying Treasuries. We are expecting a strong payrolls number, which is one of the key reports determining what the Fed will do," advises Nagai. The yield on the 10-year note may rise to 4.85% this week, Nagai said. Andrew Wilkinson, in his weekly newsletter Wilkinson's Edge, also predicted this move in Treasuries and agrees that interest rates have more room to move. According to Wilkinson: "Bear season may just have started in the bond market after a period of hibernation. I'm still hanging my hat on seeing that 4.75-5% window opening up." Short-term Rates Edge Up, Too The yield curve remains inverted, with two-year notes just a single basis point higher than 10-year notes, at 4.75%. A basis point is 1/100th of a percent.
And the cost of short-term borrowing looks like it will continue to increase. Why This Is Happening There are a few theories as to why interest rates are rising. 1. The economy is getting stronger. The jobs report on Friday will tell us more about the state of the economy, but early estimates are for substantial job growth in the range of 200,000. That much growth could give the Fed more leeway to hike rates for borrowers. The assumption is that the economy is strong enough to handle an increase in their borrowing costs. 2. Central governments around the world are raising interest rates. European Central Bank President Jean-Claude Trichet signaled the bank would increase borrowing costs two more times this year. On March 2, the ECB raised its benchmark rate by a quarter-point for the second time in three months. Also, Japan's central bank may start raising interest rates now that the country's economy is strengthening. Rising international interest rates give the U.S. more room to hike rates. 3. It's March. March is historically a bearish time for bonds. The 10-year note's yield has risen on average in March and April over the past 19 years, according to a March 2 report by Bill O'Donnell, head of government bond strategy at UBS Securities LLC in Stamford, Connecticut.
It is "the most seasonally bearish period of the year for U.S. rates," he wrote. What This Means to You The cost of borrowing - short- or long-term - is going up. That means credit card rates, mortgage rates, home-equity lines and loans and auto loan rates are increasing. So if you haven't locked in your mortgage rate yet, do so now. Rates are still historically low. But nobody knows how long that will last. If you have a variable mortgage rate or home equity line of credit, look into converting it to a fixed rate. Cut back on your credit card debt and try to pay off your cards to avoid monthly interest charges. Editor's Note:
2. OPEC: Oil Prices Hold Steady But Could Dip On Wednesday, OPEC ministers will hold court at the Organization of Petroleum Exporting Countries meeting in Vienna, Austria. Last week, in anticipation of the event, they said that they would keep output steady as they set their production agendas for spring and summer. "A warmer-than-usual winter in the United States, the world's largest consumer, has built inventories - which should drive prices lower," reports the Associated Press. "But worries about disruptions to supply from places like Iran or Nigeria are keeping prices high." Traditionally, the spring season is a slow one for oil consumption. Consumers are holding off until summer vacation to take long trips, and low demand is an unwelcome reality for oil producers. The Paris-based International Energy Agency (IEA) estimates that as warmer weather arrives, global demand could be lower by nearly two million barrels a day in the second quarter, as compared to the first three months of the year. "Certainly the producers that I have talked to are worried about the second quarter," Peter Gignoux, a London-based independent oil analyst, told the AP. "They see demand tapering off and the prices moving lower. This thought process could be a driver at the meeting." Only Venezuela is calling for production cuts this spring, the AP adds. But OPEC officials don't seem to want to take the bait. Energy industry analysts say that OPEC will more likely keep output stable, primarily due to escalating gasoline prices, threats of terrorist attacks on Saudi pipelines and continued instability in hot-spot areas like Nigeria. "While OPEC's official production ceiling is 28 million barrels a day, the group's members pumped nearly 30 million barrels a day in February," the AP reports. That was up 320,000 barrels a day from January. Analysts report that OPEC's usable spare capacity is now about 1.4 million barrels daily, or just 1.6% of global oil consumption. OPEC President Edmund Daukoru said last week that he has no problem with prices of more than $60 a barrel, so long as the global economy continues to grow. "A fair price is what the market can sustain," he said. However, when prices approach $70 a barrel, "everybody gets nervous," he said. Editor's Note:
3. Gold Rush for Spring? Richard Suttmeier, precious-metals columnist for TheStreet.com, writes in his March 6 column that gold should rise to a 52-week high this month. He says that both investors - especially first-time buyers - and central bankers are scooping up the lustrous yellow metal. "Gold is below its Feb. 2 high of $579.50, and it held its 50-day simple moving average at $538.10 on weakness into Feb. 14," Suttmeier writes. "There is overbought momentum on the weekly chart; weekly closes above the five-week modified moving average of $548.60 would support a move to higher prices. My semiannual pivot of $551 should now serve as semiannual support." He adds that the precious-metals industry is 31.6% overvalued but Harmony Gold and Compania de Minas Buenaventura are undervalued. "Harmony Gold is rated a hold by ValuEngine," he says. "It's trading 6.3% below its fair value of $15.89. The weekly chart profile shows declining momentum, and the five-week MMA is $15.35. Investors should consider adding to this position on weakness to the 200-week SMA of $12.55."
Buenaventura, Peru's biggest precious-metals producer, reported a 31% increase in earnings in 2005 to $274 million. "It's rated a strong buy by ValuEngine," says Suttmeier. "The weekly chart profile shows declining momentum, with the five-week MMA at $27.35. A weekly close above $27.35 would shift the weekly chart profile to positive. Investors should consider adding to this position on weakness to my quarterly value level of $23.07 for a return to the annual pivot of $26.03." Editor's Note:
4. GM Struggling to Survive
Auto giant General Motors is fighting for its life - while the company's retirees say they are fighting for their rights.
"A group of retired GM factory workers ... testified that the deal GM struck with the United Auto Workers union had unfairly shifted health-care costs to them and undone a promise by the No. 1 car maker to provide full health benefits for life," according to Reuters.
GM says it will add some $3 billion to the fund over the next five years. According to Reuters, GM's "total health-care liability stands at $74 billion and is projected to exceed $90 billion by 2009." Editor's Note:
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