Could Rising Interest Rates Derail The Economic Recovery? Posted by marcus in Untagged

Now that an economic recovery appears likely, the markets have a new bogey-man they’re concerned about—Higher Interest Rates. In the government’s attempt to finance the economic recovery by selling billions of dollars of debt, interest rates have been steadily climbing of late. In fact, the resulting selloff in Treasury prices has not only pushed up their yields, but pushed up the all-important mortgage rates as well. This is already slowing down mortgage applications once again.

Another reason Treasury yields are rising may be because the market is anticipating positive economic growth in the second half of this year, coupled with a concern about inflation thanks to the huge increase in supply over the next two years owing to the growing budget deficit.

Finally, the purchase of T-bills by the central banks of Japan and China has also been considered a reason for the rise in intermediate and longer-term rates as well. They are creating money domestically and buying T-bills with it. They are doing this to keep down the price of their currencies in relation to the dollar which subsidizes exports. This monetary policy creates demand for dollar-denominated short-term U.S. government debt, which lowers the T-bill interest rate because the seller (the U.S. Treasury) can offer to pay a lower rate and still get buyers. Some then conclude that intermediate and longer-term interest rates rise because the economy is then likely to improve.

So what are some of the consequences that higher rates could have on consumers and the economy? If Treasuries continue to sink, then many equities will likely follow. Rising long term interest rates could stifle both the housing recovery, corporate profitability and the overall economy.

But In the long run, the huge government borrowing and money printing undertaken in the quest to right the economy may make sense. Amid a severe downturn, the Fed must do everything it can to counteract it, namely by expanding its program of buying Treasuries.

So what can members do to profit in a rising-rate environment? Historically, commodities such as precious metals and energy, as well as stocks linked to these commodities have fared the best. Below is a list of commodity-linked stocks members may wish to keep on their radars.