Even before the Bangkok Grinch stole Christmas, managers of U.S. pensions and other institutional funds were already turning more cautious.The number predicting a recession in the next year has trebled in just a month, according to the latest Merrill Lynch fund manager survey. OK, it's still only 24%. But a majority, 60%, think the economy will at least weaken. Among the reasons: a likely slowdown in earnings growth, worries over the housing market, and predictions that long-term borrowing rates will at last rise after years at historic lows. We've been here before. Those long-term rates have been defying the doomsayers for several years. And the Merrill survey sample of 26 fund managers is too small to be the final word. But Merrill strategists note three reasons why rates have stayed artificially low for so long and why, sooner or later, they ought to rise back to average levels. The first: Thanks to outsourcing, many Asian countries -- including, of course, Thailand, but more importantly Japan and China -- have been running huge trade surpluses with the U.S. They have then been lending us back those dollars cheaply to keep the value of their own currencies down against the dollar. That keeps their exports cheap in the U.S. The second: Pension funds have been forced buyers of bonds for technical reasons.
And third: U.S. companies have been generating such huge profits that they have needed to borrow less money than usual. Fewer borrowers means it's cheaper to borrow. As Merrill pointed out in a strategy session in London earlier Tuesday, any U.S. economic slowdown could drive rates the other way for two reasons: First, companies will generate fewer profits, so some will need to borrow more to finance expansion. And second, if U.S. consumers spend less, then we'll be running a smaller trade deficit with those Asian countries. So they'll have less money to lend us. The danger, as usual in financial markets, is a vicious circle. If long-term rates rise, they'll take mortgage rates with them. You can imagine the effect on the housing market -- and the effect, in turn, on consumer spending. None of this is certain. But it's among the reasons I have parked a small amount of money in ProFunds' ( RRPIX) Innovative Rising Rates Opportunity Fund , which rises and falls with long-term interest rates.