NEW YORK (TheStreet) -- There are three major factors that will serve to keep U.S. intermediate and long-term interest rates low for 2015, and, perhaps, beyond:
• Alternative investments are unattractive
• Foreign central bank "quantitative easing" programs (also known as QE, asset buying programs by central banks designed to add liquidity to the market) will result in funds which will inevitably find their way into U.S. capital markets
• New U.S. bank liquidity rules are creating huge demand for full faith and credit U.S. assets
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Alternative to U.S. Bonds
U.S. Treasury and agency rates are much more attractive than their competitive alternatives. The German 10 year bund now yields 0.7%; the French 10 year less than 1.0%; the Spanish 10 year less than 2.0% (this is BB rated = junk!). The U.S. 10 year currently yields somewhere near 2.30%.
If you were a portfolio manager and were required to hold sovereign debt, it is a no-brainer as to which one you would choose. Thus, as long as Europe is struggling with growth and that is playing the easy money game, U.S. Treasury intermediate term rates will be attractive. At the same time, if the U.S. budget deficit continues to shrink, the demand/supply cross will serve to push rates lower.
Foreign Central Bank QE
The Bank of Japan, The Peoples Bank of China, the European Central Bank and the Bank of England are all facing slow economic growth or outright recessions. They learned the value of QE from the Federal Reserve.
Over the past quarter century, the large U.S. budget deficits have been welcomed by a globalizing world. The dollar, after all, is the world's reserve currency and there must be enough of them to lubricate world trade. Over the years, the U.S. budget deficits, financed with IOUs (i.e., paper dollars), have become a deep pool of liquidity facilitating world trade. A transaction between a South Korean manufacturer and a Turkish purchaser is transacted in dollars -- but this transaction does not impact the U.S. economy or its GDP.
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