HOW high are interest rates going?
Today is crucial.
While Washington would love for the government statistics to show a lot of job growth in February, that’s the last thing that the bond market needs.
A strong labor report could goose rates close to the scary 6 percent level.
That’s not what was expected to happen.
Almost every “expert” on Wall Street has been predicting that interest rates would be headed lower this year or at worst stay where they were – which was at about 5.10 percent for the 30-year government bond at the beginning of 1999.
This column has been predicting the opposite, arguing that the scandals in Washington plus the Japanese repatriation of their assets (partly out of fear of the Clinton mess and partly to help the economy back home) would cause borrowing costs here to rise.
And that’s exactly what’s been happening.
Yesterday, Washington’s long bond was yielding around 5.7 percent and its price had fallen 7.5 percent since the beginning of the year.
This column wasn’t predicting statistics out of Washington that show an economic boom in the fourth quarter of ’98.
All anectdotal evidence from the September-through-December quarter seemed to show that business conditions softened, with consumers becoming more cautious and employers laying off people in response to weakness in foreign business.
Despite what seemed to be happening in the real world, Washington had its own take – with the gross domestic product jumping more than 6 percent in the final three months of ’98. Politicians and consumers cheered. Inflation-watchers, including the do-nothings at the Federal Reserve, choked.
That’s how rates got to today’s levels, which are shocking to the financial community since a survey in the Wall Street Journal on Jan. 4 had 49 out of 50 economists predicting interest rates wouldn’t be a market factor in the first six months of this year.
So where next?
“Everyone thinks the rise in rates is over with,” says Charles Peabody of Mitchell Securities, New York, who has long been anticipating higher rates and is now predicting 30-year bonds at least at 6 percent and maybe even 7 percent before long.
The big problem could come over the next few weeks. With the Japanese fiscal year ending on March 31, investors in that country have been bringing money back home to shore up domestic financial problems. That should have caused a drop in the value of the dollar (which, I explained in a column last week,) hasn’t occurred.
But this repatriation effort, which I’ve been predicting for years, has had one predictable effect – the higher interest rates we are now seeing
The reason is simple: if the Japanese are selling billions of our bonds to bring their money back home, rates need to rise to attract buyers. And rates might jump abnormally high if Americans are shunning bonds in favor of putting their money into the stock market bubble.
Peabody thinks there are other reasons why rates are climbing. “Inflation is not the reason for the higher rates,” he says. Instead, they are the “unintended consequences of Alan Greenspan’s easing,” an excessive amount of borrowing and a deterioration of the American government’s finances.
That last thing, Peabody says, is the result of a horrible deterioration of the U.S.’s trade deficit. More than the Federal budget (which Barron’s now joins me in revealing really doesn’t have a surplus), the trade deficit represents a frightening flow of goods and capital out of this country.
Most experts would say there is one good bit of news that’ll keep interest rates stable. Inflation is low. Historically low.
But I’m not so sure they are measuring the right thing.
While the price of pork, gasoline and other household necessities might be stable, the level of assets inflation is anything but safe. Just think of all the people who’ve made fortunes trading Internet stocks. Or who’ve benefited from the stock market bubble. Or those who are more-than-adequately supplementing their income by day trading in the stock market.
What experts fear is that these inflated assets will be cashed in en masse and be converted into product inflation. It won’t take much for people to liquidate their stock portfolios, pay their taxes and buy a car.