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Are Interest Rates on the Rise???

March 14th, 2012 3:26 PM by Gregg Mower

Today was the worst day for interest rates in 2 years. Why you might ask? We are not out of the recession yet, the economy is not good, but one thing has happened if you have been paying attention to the news. The Stock Market has hit records for the year and that is where the money is flowing. So you ask why would a good stock market create bad interest rates? Well I will give you the simple explanation then I will get a little deeper into the economics of money.

The Stock Market is where you bet that companies will be profitable or not by their traded market value or stock price. Put simply, you invest traditionally in company that you think will go up in value or down in value and the Stock Market is the place where those companies stock is traded publically. The Bond market works in reverse where if you bought a bond and the yield is say 6% and you bought it for $100 and the face value of the bond is $100 for a 6% yield then you bought that bond for even money. Now lets say the bond yield or interest rate drops to where you can buy a $100 bond now for 5% your 6% bond you bought yesterday might be able to be sold today for $110 simply because somebody wants the higher yield on their money over time. This may sound confusing but if you think about it for a while it will make sense.

So if more people want get into the stock market because they think it will yield higher returns than bonds then people sell those bonds to get liquid to buy stocks. This is exactly what we are seeing in today’s interest markets and equity markets (the bond market and the stock market respectfully). From an economic point of view there are more sellers of bonds and that will push prices lower and rates or yields higher. To use the example from above if the same 5% bond has more sellers than buyers instead of being able to sell the %100 bond for $100 at 5% the seller may have to lower the price to say $98 to sell the same 5% bond and possibly the 6% $100 move back down to a even or par price for $100. This is the simple economics of interest rates. When you are listening to the radio or watching TV and you here the bond market was higher today that usually means that rates are going lower and conversely if you here the bond market went down that generally means the interest rates have gone up.

So today March 14th 2012 the bond market sold off to create more capital to go into the stock market. Will this trend continue? I don’t think so as I am not a believer that the economy is going to be on a long term improving trend. I think gas prices going up will slow the economy even more, and with any bad news of the economy the stock market will sell off and people will take their capital and invest in bonds and interest rates will again go lower. A factor I did not cover in the blog is the government part of this whole talk. At any time the government may step in and do things to stimulate the stock market or the bond market. I am not saying the two market are inverse of each other but a lot of time they do work that way. The government aspect of this economic talk will be discussion for another day.

Look for more on this in the future as this is my one of my passions, and as always give your input.

Posted in:General
Posted by Gregg Mower on March 14th, 2012 3:26 PM

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