How To Protect Yourself From The Coming Interest Rate Rise

How To Protect Yourself From The Coming Interest Rate Rise
posted with permission from: http://sane-ramblings.blogspot.com/2010/04/china-is-quietly-bailing-out-of-us.html

In the last four months, China has dumped over $60 billion in U.S. government debt. As an American why should you care? Because higher interest rates are coming as the U.S. must entice buyers to replace them.

Why is China selling? They say the U.S. is flooding the world with cheap money and setting the stage for a new round of financial bubbles and potential collapse, along with higher interest rates.

But China still has $877 billion of Treasurys, making them the biggest foreign lender to the U.S. government. They are dumping it in stages, because they don't want to collapse the market, setting off world panic, and destroying the value of what they already own.

But China is not the only big seller. PIMCO of Newport Beach, CA, one of the world's largest owners of U.S. Treasurys is also dumping their holdings. Last July, 50% of their Total Return Fund was in Treasurys, now it's 30%, the smallest percent in the Fund's 23 year history.

Why is PIMCO selling? Because they believe the U.S. government's mushrooming need for money will overrun the demand for Treasurys, driving up interest rates, as they must attract more buyers.

China and PIMCO are knowledgeable investors and they have decided to dump. But now you too are aware and can take steps to protect your financial security.

For example, lock in cheap long term fixed rate financing now, whether on real estate or on credit lines, and pay down your credit cards. Keep your savings flexible for lenders will have to pay more to attract your money. If you need to get rid of a boat, a motorcycle, or whatever, do it now while buyers can still get cheap money.

If you want to sell your home but are waiting for higher prices, what will happen to those prices as interest rates rise? Price it too sell now.

We are headed for a bumpy ride, but together, we will get through another financial crisis. In the meantime, be sure to find some joy each day and share it with others.

was the top holder of our securities?

Prior to the Chinese dump, they were #1.

While us poor working schmucks in the 70s saw prices rise out of sight as interest rates soared past 10 and then 15%, it was a golden time to be an investor...bonds and T-Bills were going for high returns and the smartest investors were able to lock into those double digit rates for years...even after the inflation subsided.

For the banks, it's also a win-win as with few caps on their already obscenely high lending and other interest rates, the rise in the Fed rate will be passed along to consumer making tight credit even tighter and earning more in interest and transaction fees. Remember, the big banks never lose...

...and have risen on 10 year T-Bills, which are the ones lenders use to price their 30 year fixed rate mortgages, typically adding about 11/2 points in interest rate over the price of the 10 year T-Bill.

The Fed has been actively buying the 10 year T-Bill trying to force prices down, yet they've still risen to about 3.8% from under 3.5% and would be easily over 4% and headed toward 5% without the Fed's intervention. Less than two weeks ago they passed 4% and then the Fed jumped in.

Unfortunately, global investors see this and some are heading for the exists.

and should be followed whether or not there is a significant rise in home mortgage rates. Waiting for that bigger fool to turn up is a loser's game in a buyer's market like this one whether they rise or not.

Yes, interest rates will rise, but I sincerely doubt we're going to see the Draconian rate hikes of the late Carter and early Reagan years. We don't have inflation to cool down and we do have deflationary pressures as the job market continues to be grim. Interest rates only have to rise enough to make our bonds look like attractive investments, and mortgage rates will not rise to punishing levels because of it.