Rising Interest Rate Pressure Stymied by Falling Interest Rate Pressure

March 8, 2015
Bond Market Tells Savers: Higher U.S. Rates to Disappoint

Now, savers counting on higher rates to lift returns are being stymied by regulations designed to make the financial system safer. The rules are pushing firms to park more excess cash into Treasury bills that yield next to nothing, squeezing money-market funds that buy the short-term debt. JPMorgan Chase & Co. says demand will jump as much as $900 billion in the next 18 months, equal to about 60 percent of the total outstanding.

$0.9 trillion here. $0.9 trillion there. At some point we're talking serious money.

So much cash. So few places to put it. Have I mentioned my long-standing theory about how it is getting harder and harder to make money off of money lately? Once again, investors can pry the long-term TIPS and I-Bonds from my cold dead fingers. I continue to have every intention of holding to maturity. Treasury bond bubble my @$$.

As a side note, what would happen to all that excess cash if firms were not being forced to buy Treasury bills with it? Is there some sort of firm couch where the money would otherwise be stored? You know, some sort of firm couch of last resort? Everyone loves safety cushions! That's especially true if the cushions are packed with cash! And how about safety cushions filled with cash that also double as flotation devices? Nirvana!

Or does all that excess cash just magically vanish? Inquiring minds want to know!

In all seriousness, too much cash chasing too few Treasury bills does not a rising interest environment make in my opinion, contrary to the popular belief that long-term rates must rise due to all this money printing. Or better still, long-term rates must rise just because everyone seems to believe they should. Talk about a crowded belief trade. Perhaps the magic only works if everyone truly believes. I hate to disappoint you, but this saver remains extremely skeptical, especially concerning inflation protected long-term bonds over the long-term.

Call me silly if you will, but the idea of locking in acceptable real yields has always appealed to me. If there is one lesson to be learned from falling off the gold standard, it is that things can always get worse for savers. There is no limit when it comes to financial pain and economic oppression.

This is not investment advice.