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Where are interest rates going?

Before we answer this, it helps to understand what interest rates are. Interest rates are really the price of money: they balance the available supply of cash with the demand for loans. All the other factors–credit, time-frame, liquidity–just modify this.

So if you have good credit and borrow against solid collateral, lots of lenders will offer you a loan and your interest rate will be lower. Conversely, if you have lousy credit and only a few banks wants to lend you money, you’ll have to pay more.

So to understand the direction of interest rates, we have to understand money’s supply and demand. To start with, there is a huge supply of investible cash around the world. The Chinese have trillions. Other Asian countries and the Arab nations have billions. And there’s lots of talk about how US consumers are starting to save more.

So the supply is up. Who’s gonna borrow all that dough? Western governments like the US, UK and Japan: countries with budget deficits. Some M&A players need to borrow, though less of that is debt-financed these days. And not so many mortgage borrowers as before. But apart from government bonds, the demand for debt is decidedly down.

So with global savings up and borrowing down, I think we can plan on lower interest rates for a while. That should help the keep economy moving along. And the smart money will try to stay in front.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-05T13:27:38+00:00 October 1st, 2009|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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