When RBI raised the CRR recently,I had blogged on January 29,2010 ,that I was increasingly getting impressed with our RBI Governor,Dr Subba Rao.
RBI announces a CRR hike by 0.75% to 5.75% to tackle Record Food Inflation at 17.40%…Interest rates must rise soon !…Equities will React
But why did the Federal Reserve Board raise the Discount rate by 0.25% to 0.75%…the first rise since 2006 ?
For the record the Fed stated
The move will encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs…..These changes are intended as a further normalization of the Federal Reserve’s lending facilities.The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.
But just think……
US Economic and Housing Recovery is years away
Unemployment Rate is yet over 10%
Record Deficits (US $ 1.6 Trillion this year) and Debt (US $ 15.6 Trillion and counting) will continue for Years
US $ 4.8 Trillion Foreign Debt
The US Mint will be running at overcapacity for years to come !
Rising Interest rates would spell disaster for the recovery process
So they why did the Fed raise the Discount rate ?…the rate at which it lends to banks
The simple answer is that It simply had no choice !
The Treasury Auctions were showing signs of not just Investor weariness,but also the bids had become more demanding for better yields
In the days preceding the announcement of the Fed Discount rate hike,the US Treasury attempted to auction US $ 25 Billion worth 10 year Notes and US $ 16 Billion worth 30 year Bonds…Bidders,that included Foreign Governments and other International Ivestors bought 35% less of these long term securities than they did at earlier auctions
Indirect Bidders that include Foreign Central Banks,bought just 33.2% of the 10 year notes sold…down from the 39.3% ten auctions average…shows overseas investors not as aggressive as before…Yeilds were 3.692% ,up from the expected 3.68%
for the 30 year bonds the yeilds were higher at 4.72% than from the 4.687% expected with Indirect Bidders taking just 28.5% of the Bonds,down from the Ten auction average of 43.2
…..and China for the first time since 2000,sold a net US $ 34.2 Billion of US Treasuries and now holds US $ 755.4 Billion in it’s FX Reserves….Both,India and China have been buying more Gold to increase it’s weightage in their FX Reserves
Clearly Strong Overseas Lenders are forcing US to raise Interest rates….so if US officially does nothing to increase the Interest rate overseas lenders sink US Bond Prices by selling off Bonds or not buying them !…. to increase the Yeild !….They’re bluntly warning USA that if you don’t act,we will !…and a desperately indebted (over 60% of total Treasury Debt is owed to foreign lenders) USA has to meekly toe the line !
Problem is how long will Overseas Investors bail out USA !….the writing is on the Wall !…With over US $ 2 Trillion in Fx Reserves,China has begun to offload US Treasuries in it, to reduce exposure to the US Dollar and USA
So we had the Wall Street Internet Bubble bursting in the late 1990s ,the US Housing Bubble Bursting in inside ten years of this….and now US is facing a Long Term Treasury Bond Bubble !
Read an earlier Blog on January 7,2010 where I had said India would raise CRR by 0.5% to tackle Food Inflation later in the month…..Gold will seek further highs….. and warned Investors to stay away from Long term US Treasury Bonds
2010…what’s likely to Go UP and what’s likely to Go DOWN….will help you in rebalancing your Portfolio
And if you think India is decoupled enough from USA…think again