Since March 2009, the US Fed and other central banks have tried to reflate markets. One of the key ways was to us central bank money to purchase mortgage bonds to help keep home mortgage rates low. This also encourages money to flow into the stock market as interest rates are not as attractive.
Now US and world interest rates are rising again. The US Ten year yield rose from 2.6 pct to 3.1 pct in two months since October. European yields are also up, and China is going to be raising interest rates again. The EU credit problems are the reason for their higher rates.
China is experiencing inflation, and will be raising interest rates.
Turning point now
The US is going to find out if the Fed can pull longer term rates down, the US Ten year Treasury is a benchmark for home mortgage rates. But if the Fed begins its QE and US interest rates are not coming down, then another new phase is beginning in the credit and financial and gold markets.
Gold has marched up, holding its gains. Even though rising interest rates put pressure on gold (gold does not pay interest) gold’s strength belies the rising USD even. Surely much of that is flight to safety in cash, as many investors feel markets are not establishing any meaningful trading direction in the last month (US Stocks meandering).
But if markets are at a turning point, when will we know its results? IE the major new trend? Clearly since US rates are rising, a key test will be to see if the Fed can keep rates from rising with their QE plans. Since the QE is supposed to start in early December, we should know something soon. If rates keep rising, the Fed may have to significantly increase QE.
Bernanke stated he does intend to increase QE as necessary. Clearly this is one reason gold hold’s its gains in spite of the USD strengthening.
