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Interest rates beginning to rise as China and Japan dump Treasuries

Interest rates beginning to rise as China and Japan dump Treasuries

From the beginning of May through to the end of June, interest rates soared 100 basis points to their highest level in two years.  The catalyst for this appears to be coming from Asia, as China and Japan sold off $40 billion worth of their reserves at the exact same time interest rates shot up.

In fact, on Aug. 15, the 10-year Treasury bond yield rose to over 2.75, which is the highest it has been in two years.

10 year

Lutz points to interest rate on the 10-year climbing to a 2-year high, as another hurdle for investors. “That’s going to weigh on a tremendous amount of the dividend names out there,” says Lutz, ticking off REITS, consumer staples, the home builders and pharmaceuticals. Throw Walmart’s miss into the mix and that’s more than ample reason to justify what is now the worst 2-day run for stocks since late June.

Investors weren’t expecting any great shakes from Walmart but interest rates could prove to be a longer-term issue for stocks. – Yahoo Finance

China and Japan have a combined $2.3 trillion in dollar reserves that are mostly held in Treasuries, and for the past year, they have been primarily selling their bonds versus their previous five year trend of purchasing them.  Because of this, the Fed has had to be the primary buyer of government bond issues, and it has forced the central bank’s balance sheet to grow over 400% since 2008.

For investors, home buyers, and anyone reliant upon interest rates, what China and Japan do going forward will have a major impact on economic growth in the U.S..  If the dumping of just $40 billion from their reserves can make interest rates rise 100 bps, imagine what it will do for bonds and rates if that amount increases, or even stays constant every month.

No matter what Japan does, their economy is already in crisis, and if inflation rises too fast for their consumers then they may have no alternative but to dump their dollars to protect their own interests.  For China however, the fact that they are already making moves towards the creation of a new reserve currency by calling for a new Bretton Woods and accumulating greater gold reserves, their selling of treasuries in bulk would signal an international play to drive the dollar out of the picture, and bring major inflation to America’s economy.

The stocks, bonds, and U.S. consumers are all signalling that a recession, or major economic event is just on the horizon, and because of five years of central bank money printing, there is little the Fed can now do to stop it, or even slow it down.  Couple this with a short squeeze taking place in the gold and silver markets, and America is getting a front row seat to the next economic crash, beginning with the Bond markets.

Kenneth Schortgen Jr is a writer for Secretsofthefed.com, Examiner.com, and hosts the popular web blog, The Daily Economist. Ken can also be heard Friday evenings giving an weekly economic report on the Angel Clark radio show.

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