Monday, March 14, 2011

Japan's Impact on US Interest Rates

March 14, 2011
As Japan seeks to finance reconstruction, U.S. debt costs could rise

Now, as it begins the costly process of rebuilding, Japan will almost certainly be buying less Treasury debt and other foreign assets. That in turn could push the United States to pay higher rates on its securities to attract new buyers, eventually putting upward pressure on other U.S. interest rates — including what American consumers pay for credit.

I'm not a believer in the theory. The bond market isn't either apparently.

The natural disaster in Japan has created no discernible impact on US interest rates or US inflation expectations. Look at the rates last Friday. Compare to today's rates. The transition was as smooth as a baby's bottom. Surely if there was money to be made on betting that interest rates would rise due to the earthquake and tsunami, then high-frequency trading programs would be making heavily leveraged bets on it by now. There would be no smooth transition. We definitely saw this effect as investors rushed to sell Japanese stocks today.

Here's the problem with the theory. If Japan sells US Treasuries to raise US Dollars, uses those US Dollars to rebuild its country, then someone else will be stuck with those US Dollars. What is that someone going to do?

Which makes more sense?

1. Bury the US Dollars in a secret vault and hope they maintain their value.
2. Buy US Treasuries so that they will earn at least some interest.

Perhaps you are thinking that they will decide to spend those dollars on something else instead. Okay, fine. Now the next someone is stuck with US Dollars, and so on, and so on. Eventually those US Dollars will stumble into the hands of someone who will buy US Treasuries though.

I am not concerned about rising real yields on my long-term inflation protected Treasuries. If anything, I am worried about even lower real yields in the future. The potential to increase purchasing power by investing in relatively safe Treasuries has been declining for a decade. In my opinion, this is no longer the era of making money off of money. That party ended.

Just opinions of course.

Source Data:
Daily Treasury Yield Curve Rates
Daily Treasury Real Yield Curve Rates


Mr Slippery said...


What are you seeing for treasury rates tonight? Bloomie is reporting the 10 year yield down 18 basis points, 5 year down 23! Four minutes before close today, I bought a chunk of long bonds. I wasn't betting on nuclear disaster, mostly technicals. Big daddy isn't doing as well as the middle of the curve, yield down 11 bps. Everything feels wobbly at the moment.

Stagflationary Mark said...

Mr Slippery,

Bond prices way up. Stock futures way down. Risk trade off.


CP said...

Exactly - this is not bearish for Treasuries; if the disaster has any effect it will just be the straw that broke the camel's back for the risk trade, and be bullish for Treasuries.

Mark, did you see the bet over on Credit Bubble? $1 that 30 year will be 4.05 before 5.05.

Stagflationary Mark said...


I did not see your prediction. However, I did buy EE Savings Bonds for the first time in my life back in October.

More EE Savings Bonds Thoughts

I consider this to be a one-time opportunity based solely on relative value. I will be a buyer this month before rates reset on November 1st. I do not expect to make an EE Savings Bond ladder part of my nest egg.

I get 1.4% per year but 3.53% per year if I hold 20 years. Still holding.

Since you made a daring prediction, let me also make one. Brace for it. It is going to be quite the shocker.

The fixed rate for I-Bonds purchased on May 1st will be 0.0%. The rates are set every 6 months and are good for the life of the bond.

Okay, okay, maybe it isn't a shocker. The TIPS bond maturing on 4/15/2015 now yields -0.71%. 0.0% would therefore be a gift.

It looks like I'll be waiting until November to make my annual purchase in 2011. The rate cannot go lower and I suppose there is a small chance that the rate can go higher. I'm not holding my breath though.

CP said...

With predictions, the more shocking, the better.

Silver to single digits.

Stagflationary Mark said...


That is a shocking prediction. I owned silver from under $7 to just over $10.

I'm like the world's worst parabola rider, lol.

That said, the money I made off of precious metals (even after taxes) from 2004 to 2006 have covered virtually all of my living expenses for the past 5 years. I had a third of my nest egg invested in rocks. I really can't complain. :)

Stagflationary Mark said...

Panic buying adds to shortages after Japan quake

"The situation is hysterical," said Tomonao Matsuo, spokesman for instant noodle maker Nissin Foods, which donated a million items including its "Cup Noodles" for disaster relief. "People feel safer just by buying Cup Noodles."

The World Gold Council should seize this opportunity to airlift in some gold noodles, if only to prove to the world that gold's appeal as an apocalypse hedge is still intact (even at these lofty prices).

Stagflationary Mark said...

Anderson Toyota Not Anticipating Big Supply Shortage Due to Idled Japan Plants

"A lot of our parts do come from Japan especially those sold our parts department and those might have a little bit of a slowdown, but it should be back to normal here soon, very very soon."

Soon = Confident
Very Soon = Concerned
Very Very Soon = Desperate
Soon, Very Very Soon = Holy @#$%!

Stagflationary Mark said...

Today was definitely a wild ride.

Jazzbumpa said...

The natural disaster in Japan has created no discernible impact on US interest rates

The natural disaster in Japan has created no discernible impact on Japanese interest rates.


Stagflationary Mark said...


Indeed. All bark and no bite.

Who Struck John said...

The downside of Just-In-Time inventory and supply chain practices is that if a major disruption hits, the supply chain is FUBAR.

Stagflationary Mark said...

Who Struck John,

The stock market supply chain is apparently currently FUBAR. D'oh! ;)