This Rally Still Has Plenty of Room to Run

U.S. interest rates are lower than you'd expect because demand for U.S. Treasury bonds from overseas investors looking for safe yields and big leveraged profits has kept the price of the bonds high. (The yield on the 10-year Treasury note was 4.69% on Friday, compared with 6.44% at the end of 1999.)

This cash has had the effect in the U.S. stock market of supporting stock prices and prolonging the rally. Overseas investors have purchased U.S. stocks. U.S. companies have borrowed to buy back their own shares. Overseas companies have launched bids, funded with cheap debt, to buy U.S. companies. For example, when Argentina-controlled pipe supplier Tenaris(TS Quote) recently announced its acquisition of Houston-based Hydril(HYDL Quote), the all-cash deal was funded with cash from the company treasury and from bank loans.

Will This Change?

Of course, the flood of cash won't continue indefinitely. And there's no reason that the flood has to flow into U.S. financial assets.

Let me take those two points one at a time.

First, the Bank of Japan could shut off the global carry trade by closing the gap between Japanese interest rates and U.S. and other international interest rates. But this gap is so huge that one or two quarter-point interest rate increases won't make any significant difference. In fact, a quarter-point rate increase this month or next might actually increase the flow of cash, because it would reassure those borrowers who have started to worry about an overreaction by the Japanese central bank -- say, a big, sharp increase in rates -- that might topple the whole structure of the carry market.