The 10-year Treasury continues to trade in the 1.90 percent to 2.10 percent range (with recent activity closer to the lower end of that range), and the current economic data (federal deficit, housing, unemployment, productivity, GDP growth, etc.) still isn’t that stellar. The Fed is still trying to keep longer-term rates low via Operation Twist and other mechanisms, but it just seems that rates should have increased above these historic lows.
If you’ve filled up your gas tank recently or shopped in the grocery store, prices for the basic staples
of life have increased dramatically over the past year or so, indicating that there is inflation pressure.
And since the ability of the Fed to keep rates low is limited (as they do not have unlimited funds), why haven’t rates increased — at least to the 3 percent range?
Something dramatic is happening with the continued implementation of austerity measures
in the southern European countries such as Greece, Spain, Portugal, Italy, and France. The voters are simply saying no. On Sunday, May 6, 2012, French President Nicolas Sarkozy lost to his socialist rival François Hollande, and voters in Greece punished their political establishment by giving more power to “protest parties” such as the Marxist-Leninists and neo-Nazis.
In particular, it was President Sarkozy who sided with the Germans and helped push through the European Union (EU) bailout of Greece in exchange for increased austerity measures. Now it appears that the whole flow of Greek aid may stop if further public spending cuts aren’t made by June.
What does all this mean? Although the United States certainly has economic issues
to address, we still look a lot stronger than many of our European counterparts, so investors are still betting on the U.S. — buying our debt, and keeping rates at historically low levels.
My expectation is that with Greece’s economy shrinking about 14 percent over the past three years, and with Greek unemployment hovering around 22 percent, they will not be able to satisfy the austerity targets set by the EU and International Monetary Fund (IMF). Look for Greece to leave the Euro; perhaps even the EU. Spain and Italy are teetering on needing bailouts, putting additional pressure on the Eurozone and its currency.
The U.S. dollar, currently trading at about $1.31 per Euro, will strengthen perhaps to the $1.20 to $1.23 range, adding more pressure on the European economies as their currency weakens. This will hurt U.S. exports such as manufacturing, but it will keep interest rates low here for some time, everything else being equal.
Guarantees and security. That’s what clients will continue to look for in this economic environment.